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                                  CONTENTS




1              The NARAB Working Group:
               Certification of States for
               Producer Licensing
                                              26   State Average Expenditures
                                                   & Premiums for Personal
                                                   Automobile Insurance in
               Reciprocity Under the Gramm-        2000
               Leach-Bliley Financial
                                                   By NAIC Staff
               Services Modernization Act
               By NAIC Staff



10             Medical Malpractice: The
               New Health Care Crisis or      33   NAIC Action on
                                                   Model Laws and Papers as
               History Repeated?                   of June 2002
               By Davin Cermak
                                                   By Carolyn J. Johnson and
                                                   Neal Kounkel



16             Mold: The Fuzzy Foe
               By NAIC Staff
                                              42   NAIC Education & Training
                                                   Department Calendar



21             Regulatory Controls and the
               Revised Information
               Systems Questionnaire
               By Jackie Brewer




www.naic.org                                                                   fall 2002
44




fall 2002   NAIC Research Quarterly
                                                                                                               i
                                                                                                              45


A Message to Our Readers:
                                                                Research Quarterly
T    raditionally, the RQ has served as a vehicle to                             Editor
showcase insurance department and NAIC research
projects and studies, to share regulator viewpoints                    Natalai Webster Hughes
and to present insurance topics of global, national and              Statistical Information Manager
local interest to our readers. Its role is that of “little                   nhughes@naic.org
sibling” to the Journal of Insurance Regulation and
as such we are seeking to increase its circulation                          Graphic Design
among regulators and other insurance professionals
and encourage readers to contribute to its content.
                                                                             Teresa Smith
   NAIC staff researchers and writers intend to keep                       Research Analyst I
you informed through the RQ. We will tell you about                         tsmith@naic.org
projects, programs and products developed by NAIC
committees and working groups, and we will inundate          Heidi Robertson              Jon Carenza
you with pages and pages of statistical and financial        Editor, Graphics Design      Graphics Deisgn
information from the world’s most comprehensive              hroberts@naic.org            jcarenza@naic.org
databases. We want the RQ to evolve. We want it to
become a professional journal for our members. We
                                                                             Contributors
want regulators to use the RQ as a forum to advocate
regulatory viewpoints, share regulatory theories and
promote regulatory ideas and innovations.                                   Eric Nordman
                                                                       Director, Research Division
   The release of each RQ is scheduled approximately                      enordman@naic.org
one month before each national meeting: Spring—
February; Summer—May; Fall—September and                                Thomas Kindred, Jr.
Winter—November. This is intended to associate the                   Research Financial Analyst III
distribution of each RQ issue with the NAIC quarterly                     tkindred@naic.org
national meetings, which are also designated by
season.
                                                                            Davin Cermak
   Contributing writers can submit articles and other                          Economist
information for publication with the expectation that                      dcermak@naic.org
each RQ issue will be exposed to more than 1,000
meeting attendees.                                                          Teresa Walker
   If you would like to contribute an article(s)                          Research Analyst III
of interest on an insurance issue, share a                                 twalker@naic.org
department project or idea, provide written
commentary in response to someone else’s                                    Laura Deatrick
project or ideas, advertise an event or special                            Research Analyst II
activity or just plain get your name in print,                              ldeatric@naic.org
please contact Natalai Hughes, nhughes@naic.
org or Teresa Smith, tsmith@naic.org for                                       Publisher
information on getting your article published.
                                                             National Association of Insurance Commissioners
   An annual subscription to the Research Quarterly
                                                             Publications Department
is $100; individual copies are $25. Regulators may
                                                             2301 McGee Street, Suite 800
obtain copies at no charge. Contact the NAIC
                                                             Kansas City, Missouri 64108-2604
Publications Department at pubdist@naic.org for
                                                             (816) 842-3600 Fax: (816) 460-7593
order information.
                                                             E-mail: pubdist@naic.org

www.naic.org                                                                                           fall 2002
ii
46


A Note From The Editor...                           NAIC staff. We greatly appreciate your time and
                                                    effort in sharing information of interest to our
Gramm-Leach-Bliley and NARAB                        readers. And, to our readers, thanks for
Will a sufficient number of states meet the         continuing to read!
November 12 deadline to prevent NARAB? Find
                                                           REMEMBER THE VICTIMS.
out inside.
                                                          CELEBRATE OUR RECOVERY.
Market Hardening                                              September 11, 2002
   This is the song being played throughout the     Upcoming Features
insurance industry in 2002 and one of the main
verses is medical malpractice. The Research staff      The winter issue of RQ will be released in
is undergoing a study of the med mal insurance      November 2002. It will contain the traditional
market. Preliminary results are included in this    articles on risk-based capital requirements for
issue.                                              various lines of business. Future RQ articles will
                                                    discuss the status of a federal proposal on
Mold                                                coverage for acts of terrorism, the home
   After millions of years of existence, why is     insurance market crisis, consumer interest group
mold now damaging the property/casualty             issues, improvements to the NAIC model
insurance market? A few observations can be         Disaster Response Plan, privacy rules, a new
found in “Mold, the Fuzzy Foe.”                     report for examining commercial lines
                                                    competition and the usual annual statistical
State Average Auto Insurance Premiums               studies--so keep an eye on your mailbox.
   The NAIC State Average Premiums and              Talk to Us
Expenditures for Personal Auto Insurance in 2000
came out…finally. Despite a considerable delay         As always, we want to hear from our readers.
in publishing the report this year (attempts to     Even more, we want our readers to submit
identify data anomalies took longer than usual),    articles for publication. Let us know what you
the annual publication with results for the 2000    think about the articles we feature and what
data year was issued to regulators and to the       regulatory issues you are interested in knowing
public in July. Guess who's NOT number one?         more about. Please e-mail your articles,
                                                    suggestions for articles, comments, questions,
Improving the Financial Examination                 surveys and survey results, highlights of
Process                                             department research projects and activities, and
                                                    any other type of insurance and regulatory
   The 2002 issue of the Financial Examiner’s
                                                    research information you want to share to
Handbook contains the revised Exhibit C, titled
                                                    nhughes@naic.org.
the Information Systems Questionnaire (ISQ).
It is written in plain English rather than             The RQ is a global forum with subscribers in
technical language and is designed to improve       17 countries. Subscribe today for the only
the efficiency and effectiveness of information     insurance research information written by and
system examinations of insurance companies for      for insurance regulatory professionals. Enjoy.
financial examinations. Find out how inside.
   Thanks to all contributors to the Fall issue!
This has been an unbelievably busy summer for       Natalai Webster Hughes
insurance regulators, industry, consumers and       Editor, Research Quarterly


fall 2002                                                                      NAIC Research Quarterly
                                                                                                            1


   The NARAB Working Group: Certification of
    States for Producer Licensing Reciprocity
     Under the Gramm-Leach-Bliley Financial
           Services Modernization Act

NARAB Provisions of GLBA                             Administrative Procedure Act.2 In relevant part,
                                                     this statute states that a determination will not
   The Gramm-Leach-Bliley Act (GLBA)                 be overturned unless it’s found to be “arbitrary,
requires that at least 29 jurisdictions meet the     capricious, an abuse of discretion, or otherwise
uniformity or reciprocity requirements of Section    not in accordance with the law.” Furthermore,
3211 of that Act by November 12, 2002, in order      case law indicates that a reviewing court will
to avoid the preemption of certain state producer-   consider three factors in examining a decision:
licensing laws, through federal implementation       scope of authority, whether the determination
of a National Association of Registered Agents       was arbitrary and capricious, and whether the
and Brokers (NARAB). The NAIC elected to             decision-making process was procedurally valid.
pursue the reciprocity option, with uniformity       Chevron, U.S.A., Inc. v. National Resources
remaining the long-term goal, for non-resident       Defense Council, Inc., 467 U.S. 837 (1984);
(and resident) producer licensing. Thus,             Citizens to Preserve Overton Park v. Volpe, 401
pursuant to Section 321(a)(2), a minimum of 29       U.S. 402 (1971), overruled on other grounds,
jurisdictions must enact “reciprocity laws and       Califano v. Sanders, 430 U.S. 99 (1977). The
regulations governing the licensure of               Working Group believes that its process for
nonresident individuals and entities authorized      considering reciprocity issues, as detailed below,
to sell and solicit insurance within those states”   meets the criteria established for affording
by November 12, 2002.                                deference to the NAIC’s reciprocity certification.

   Section 321(d)(1) provides that the NAIC shall    Reciprocity Requirements Under Section
determine whether the requisite number of            321 of GLBA
states have achieved reciprocity. The NARAB
Working Group (Working Group) has been                  In terms of the general reciprocity framework,
assigned the task of interpreting and applying       the requirements for achieving reciprocity are
the reciprocity requirements under GLBA,             stated in Section 321(c). In order to be considered
determining which states are compliant and
making its report along with recommendations
to its parent committee, the Financial Services
Modernization Task Force.                            1
                                                       For familiarity of reference, when referring to a
                                                     section of the Gramm-Leach-Bliley Act (GLBA), this
   Section 321(d)(2) recognizes the expertise of     memorandum refers to sections of GLBA by their
state insurance regulators in determining            section numbers within that legislation as opposed
whether states meet reciprocity. In the event of     to where sections are codified within the United States
a legal challenge to the NAIC’s conclusion,          Code.
Section 321(d)(2) provides that the reviewing
                                                     2
court shall apply the standards set forth in the         See 5 U.S.C. § 706 (1996 & Supp. 2002)
www.naic.org                                                                                         fall 2002
2


reciprocal for non-resident producer licensing, a       of the inconsistency. While unfair trade practices
state must satisfy the following four conditions:       and consumer protections laws are specifically
                                                        mentioned, these types of laws are afforded no
(1) Permit a producer with a resident license for       heightened protection and also are subject to the
    selling and soliciting insurance in its home        requirement of consistency with Section 321(c).
    state to receive a license to sell or solicit the   The savings provision should be construed in
    purchase of insurance as a non-resident to          such a way as to allow state laws generally to be
    the same extent that the producer is                saved while still achieving the Congressional
    permitted to sell or solicit insurance in its       intent to streamline licensing procedures and
    home state, if the home state also licenses         prevent discrimination against non-resident
    reciprocally, without satisfying any                producers.
    additional requirements other than
    submitting (A) a request for licensure; (B) the        In order to provide states with a model for
    application for licensure to the home state;        meeting these reciprocity requirements, the
    (C) proof of licensure and good standing in         NAIC adopted the Producer Licensing Model Act
    home state; and (D) payment of any requisite        (PLMA) in 2000. The PLMA serves as the
    fee;                                                primary vehicle for states not only to achieve
                                                        reciprocity, but also to take major steps toward
(2) Acceptance of a producer’s satisfaction of its      reaching uniformity. With respect to reciprocity,
    home state’s continuing education                   the PLMA provides for streamlined
    requirements as satisfying that state’s             administrative licensing requirements,
    continuing education requirements, provided         reciprocal recognition of continuing education
    that the home state recognizes continuing           and reciprocity for surplus lines and limited lines
    education satisfaction on a reciprocal basis;       producers, among other things.

(3) No requirements are imposed upon any                Reciprocity Framework Developed by the
    producer to be licensed or otherwise qualified      NARAB Working Group
    to do business as a non-resident that have
    the effect of limiting or conditioning that            In the course of developing a reciprocity
    producer’s activities because of its residence      standard for use in measuring compliance by the
    or place of operations (excepting                   states, the Working Group conducted extensive
    countersignature requirements); and                 research and analysis of the relevant provisions
                                                        and legislative history of GLBA. The Working
(4) Each state meeting (1), (2) and (3) grants          Group also identified and analyzed various state
    reciprocity to residents of all other states that   non-resident producer-licensing requirements.
    satisfy (1), (2) and (3).                           Throughout this process, the Working Group
                                                        consulted with the NAIC Legal Division as well
   Additionally, the savings provision of Section       as state insurance regulators experienced in the
321(f) provides that state laws or regulations          area of producer licensing. Interested parties
purporting to regulate insurance producers              were also given an opportunity to provide
(including laws on unfair trade practices,              comments.
consumer protections and countersignatures)
need not be altered or amended for purposes of             As a result of this approach, the Working
satisfying the reciprocity criteria unless that law     Group developed a framework for measuring
or regulation is inconsistent with a specific           whether a state is reciprocal that is both
requirement noted above and only to the extent          reasonable and consistent with the spirit and
fall 2002                                                                           NAIC Research Quarterly
                                                                                                            3


intent of GLBA’s reciprocity requirements; i.e.,        means of performing a background check. 4
a desire to streamline the process of licensing         Arguments opposing fingerprints as a
non-resident producers and eliminate                    permissible requirement also focused on the
protectionist barriers directed toward non-             savings provision and questioned whether such
resident producers. The following discussion            a requirement is “consistent” with the provisions
summarizes the recommendations of the                   of Section 321(c).
Working Group on specific non-resident
producer-licensing requirements.                           After careful review, analysis and extensive
                                                        debate, the Working Group adopted the position
Fingerprints and Background Checks                      that a fingerprint requirement for non-resident
                                                        producer applicants is inconsistent with the
   The Working Group addressed the issue of the         reciprocity requirements under GLBA. Section
due diligence states may perform in reviewing           321(c)(1) provides that non-resident producers
the qualifications of a non-resident applicant,         be permitted to receive a license “without
including whether states may require                    satisfying any additional requirements other
fingerprints of non-resident applicants. With           than submitting” a request for licensure, the
respect to state review of application materials,       home state application or Uniform Application,
the Working Group determined that GLBA                  proof of licensure and good standing in the home
affords states the opportunity to determine that        state and the payment of required fees. After
an applicant meets a particular state’s                 considering several alternatives for allowing
qualifications for licensure, provided such due         fingerprints within the GLBA reciprocity
diligence requires no additional submissions            formula, the Working Group determined that
beyond the items permitted by Section 321(c)(1).3       pre-licensing fingerprint requirements for non-
Therefore, the Working Group believes that              resident producers constituted an “additional
states may perform background checks or other           requirement” that does not satisfy reciprocity
due diligence without being inconsistent with           under Section 321(c)(1). However, the Working
reciprocity.                                            Group adopted a report of the Reciprocity
                                                        Subgroup, which was appointed to address
   During the course of its discussions, the            fingerprinting issues that recommended that
Working Group considered whether fingerprints           state insurance regulators make fingerprinting
may be required as a means of performing an             a requirement for resident licensure in all states
effective review of the applicant’s qualifications.     as part of a plan to achieve uniformity in producer
Within the context of reciprocity, the principal        licensing. It also expects to adopt a similar
argument favoring a fingerprint requirement was         recommendation from the Uniform Producer
that GLBA protected this requirement as an              Licensing Initiatives Working Group.
important consumer protection through
application of the savings clause of Section 321(f),    Surplus Lines Bonds
and that fingerprints provide the most effective
                                                          The Working Group examined the use of
                                                        surplus lines bonds as both a pre- and post-
3
  This position is consistent with Section 8 of the
PLMA. Section 8A of the PLMA provides that an
applicant shall receive a license by submitting the     4
                                                          California prepared an opinion supporting the
items noted “unless denied licensure pursuant to” the   conclusion that a fingerprinting requirement did not
section that enumerates causes for taking action        violate GLBA’s reciprocity provisions, but the
against or denying a license.                           Working Group did not adopt this position.
www.naic.org                                                                                         fall 2002
4


licensing non-resident requirement. As a pre-            reciprocal. As part of its analysis, the Working
licensing requirement, the Working Group                 Group recognized the unique nature of the
determined that a surplus lines bond does not            surplus lines market relative to general lines of
satisfy reciprocity under GLBA. A consumer               authority, such as life and property. Surplus lines
protection justification was not found to be             brokering is a specialized insurance producer
available within the context of reciprocity. The         function whereby producers secure insurance
savings provision is not a broad exemption for           coverage generally unavailable from carriers
laws based upon a valid consumer protection              licensed in that jurisdiction. By contrast, general
justification. Rather, Section 321(f) saves laws         and limited lines insurance producers are
generally—including those related to consumer            licensed to sell, solicit or negotiate products
protection—provided they do not violate a specific       offered by licensed insurance carriers. In a
requirement of the reciprocity provisions of             “typical” insurance transaction, the producer and
Section 321(c). The Working Group determined             the company are licensed within the same
that a pre-licensing surplus lines bond is               jurisdiction. This dual system of producer and
inconsistent with Section 321(c); i.e., a pre-           insurer licensing is not present with respect to
licensing surplus lines bond is an “additional           risks covered by the surplus lines market.
requirement” and, therefore, states imposing
such a requirement do not satisfy reciprocity               Almost all states require resident surplus
under Section 321(c)(1).                                 lines producers to first obtain a license to act as
                                                         a general lines producer. Generally, surplus lines
   Likewise, with respect to post-licensing              producers must first search the admitted market
surplus lines bonds, the Working Group                   as a prerequisite to searching the non-admitted
determined that these post-licensing                     market. Thus, both general lines and surplus
requirements, which condition the use of the             lines authority are required in order to operate
license on having such a bond in place, are not          as a surplus lines producer. In many cases, the
consistent with GLBA reciprocity. The Working            rationale for the admitted market prerequisite
Group found that such a bond would be a de facto         is generally one of consumer protection. The
licensing requirement due to the inability of the        surplus lines insurer, being a non-admitted
producer to use the license without first posting        carrier, is not subject to the jurisdiction of
a bond.5                                                 insurance regulatory authorities in that state.
                                                         Further, there is typically no guaranty fund
Underlying Licensing Requirements for                    coverage for risks insured in the non-admitted
Surplus Lines Producers                                  market. Many states require that insureds be
                                                         notified of these facts.
   The Working Group considered whether
states may require non-residents to obtain non-             In the non-resident licensing context, the
resident general lines licenses as a prerequisite        question is whether a state requirement that
to surplus lines licensure and still be considered       non-residents obtain both general lines and
                                                         surplus lines authority is an administrative or
                                                         regulatory requirement. The Working Group
                                                         concluded that requiring a general lines license
5                                                        relates to regulation of the surplus lines market
   However, with other NAIC working groups
                                                         and is not an additional administrative
considering surplus lines bonds within the context of
uniformity, the Working Group indicated its support
                                                         requirement being imposed on non-residents.
for consideration by such working groups of the merits   The general lines license gives the non-resident
of surplus lines bonds as a uniformity requirement.      producer the authority, otherwise lacking, to

fall 2002                                                                            NAIC Research Quarterly
                                                                                                         5


search for coverage within the admitted market.      provisions requiring producer-licensing
Generally speaking, without this authority, a        reciprocity. Sections 321(a) and 321(c), which
surplus lines producer would be unable to fulfill    provide the standards for achieving reciprocity,
his or her duty to first attempt to place business   refer only to producers that sell or solicit the
in the admitted market. Thus, the general lines      purchase of insurance. Therefore, GLBA only
license gives effect to the surplus lines license.   requires that reciprocity be extended to those
Many states issue these two licenses in tandem.      classes of producers that sell or solicit insurance.
                                                     Because they do not sell or solicit the purchase
Viatical Settlements                                 of insurance, viatical settlement brokers are not
                                                     entitled to reciprocity regardless of the broad
   Two comment letters were received from an         definition of “insurance producer.”
interested party dealing with the issue of
whether reciprocal treatment should be afforded         Thus, the Working Group rejected the
viatical settlement brokers. The interested party    argument that GLBA entitles viatical settlement
contended that those states requiring separate       brokers to reciprocity in non-resident producer
licensing for viatical settlement activities could   licensing or otherwise requires states to
not be considered reciprocal. Because GLBA           eliminate requirements that those who engage
includes a broad definition of “insurance            in viatical settlement activities be separately
producer” in Section 336, the interested party       licensed to do so.
argued that the term included persons who
advise or facilitate viatical or life settlements,   Appointments and “Agent-Only” States
which would thus embrace viatical settlement
                                                        The Working Group identified states that do
brokers. Characterizing GLBA as envisioning
                                                     not recognize brokering activities in the sense
licensing reciprocity or uniformity for this broad
                                                     that all producers/“agents” are agents of the
range of “insurance producers,” the interested
                                                     insurer and thus require that producers/“agents”
party concluded that states requiring separate
                                                     be appointed by an insurer even though such a
viatical settlement licensure are not reciprocal.
                                                     requirement ordinarily may not exist for
Additionally, during the Working Group’s
                                                     “brokers.” As a general rule, the Working Group
meeting on June 10, 2002, a representative of
                                                     believes that appointments are permitted under
the interested party commented that he did not
                                                     GLBA as long as they are not required as part of
advocate reciprocity for viatical settlement
                                                     the licensing process. The “agent-only” states do
brokers. Rather, it was argued that states failed
                                                     not require an appointment as a pre-licensing
to achieve reciprocity where producers may
                                                     requirement, thereby avoiding the imposition of
perform certain services in some states but
                                                     an additional requirement to licensure.
require separate licensing to do so in others.
                                                     Furthermore, appointment requirements are
                                                     imposed upon companies, rather than producers,
   For the purposes of the Working Group’s task,
                                                     thus removing the burden from the producer
this issue is one of reciprocity. The NAIC Legal
                                                     seeking licensure. Accordingly, the Working
Division previously examined the question of
                                                     Group did not find the imposition of such an
which insurance producers were entitled to
                                                     appointment requirement to be inconsistent with
reciprocity under GLBA. In May 2000, in
                                                     reciprocity.
response to requests from several state insurance
regulators, the Legal Division issued a              Other Issues
memorandum on this topic. The memorandum
noted GLBA’s broad definition of “insurance             In the course of its consideration of issues
producer,” but reviewed particularly the             affecting reciprocity, the Working Group
www.naic.org                                                                                      fall 2002
6


analyzed other specific reciprocity issues in         and addenda were posted to a page on the NAIC
addition to those detailed above in making its        Web site devoted to the activities of the Working
determinations. These issues included                 Group and the checklists in particular. The
requirements for foreign corporations to register     documents have been and remain accessible at
to do business in other states, requirements for      www.naic.org/GLBA/narab_wg/Reciprocity_
appointment of agents to receive service of           checklist.htm.
process, continuing education requirements for
producers who have no such requirements in                The purpose behind posting these documents
their home states, requirements for trust             to the Web was to provide interested parties and
accounts, requirements for producers to be            state insurance regulators with an opportunity
insured by errors and omissions policies, special     to review and offer comments with respect to any
restrictions limiting state, special fund or state-   of the checklists and addenda. The Working
funded business to resident producers only,           Group attempted to keep interested parties
countersignature requirements, special training       informed about the status of available materials
or experience requirements, tax clearance             by e-mail communication to the Working Group’s
requirements, reciprocity for bail bondsmen,          interest party distribution list . Interested parties
greater licensing fees for non-resident producers     were advised that they had 30 days from the date
and requirements for in-state business offices.       of posting in which to submit comments to the
A review of state submissions required some           NAIC on the checklist materials. Interested party
resolution of these issues. (An explanation of how    comments also were posted to the NAIC Web site.
issues arising in the course of this review were
resolved favorably is attached to Working             Utilization of NAIC Legal Division Review
Group’s written report to the parent committee,
                                                          The Working Group requested NAIC Legal
as “Exhibit A”).
                                                      Division assistance in monitoring and reviewing
                                                      the efforts of states to satisfy the reciprocity
Review of State Laws and Reciprocity                  requirements. The Legal Division was specifi-
Checklist Materials                                   cally requested to conduct a review of producer-
                                                      licensing laws enacted by the states, in addition
   As part of its primary duties, the Working         to reviewing each completed reciprocity checklist
Group served as the NAIC entity charged with          and addendum, and to make recommendations
conducting the review of state producer-licensing     to the Working Group regarding the reciprocity
laws to help determine which states have              status of individual states.
achieved reciprocity under GLBA. In order to
facilitate this process, the Working Group               The Working Group’s recommendations
developed a reciprocity checklist (and addendum)      regarding the reciprocity status of particular
for the state insurance departments to complete       states are based solely on the following:
and submit for review. The reciprocity checklist
and addendum are designed to help identify            (a) Review and analysis of legislation6 enacted
specific non-resident producer-licensing                  by the respective states to adopt, wholly or
requirements in the states. Completed checklists          in part, the PLMA or similar legislation;




                                                      6
                                                        One state adopted changes to producer-licensing
                                                      laws by regulation rather than by legislation.

fall 2002                                                                          NAIC Research Quarterly
                                                                                                              7


(b) Certified reciprocity checklists and Addenda           (a) State insurance department personnel have
    submitted to the NAIC by state insurance                   made full disclosure concerning their
    departments7;                                              respective state producer-licensing laws and
                                                               regulations, all applicable licensing practices
(c) Representations made regarding the                         and procedures, including but not limited to
    application and effect of state law by state               those which may be based on internal rules
    insurance department personnel, who have                   or procedures, and the decisions, orders, and/
    represented they are knowledgeable about                   or findings of an administrative hearing or
    the laws and regulations of their state,                   court of law, or other action which may be
    including the practices and procedures                     construed as having the effect of law; and
    regarding the licensing of non-resident
    insurance producers;                                   (b) The laws and regulations reviewed for the
                                                               purposes, and which form the basis, of the
(d) Consultations with various state insurance                 recommendation have not been repealed,
    department personnel who are experienced                   revised or otherwise amended subsequent to
    with producer-licensing issues, as well as the             its review and analysis, and if such
    NAIC Legal Division and other NAIC staff                   amendment has occurred, the states would
    personnel who are generally knowledgeable                  have provided notice to the NARAB Working
    about the licensing of insurance producers;                Group or the NAIC Legal Division.

(e) Recommendations of the NARAB Working                      Finally, some of the states listed below have
    Group regarding a framework for                        enacted producer licensing legislation that is not
    interpreting the reciprocity requirements              in effect as of the date of this report. Thus, the
    under GLBA; and                                        checklist materials and the corresponding
                                                           recommendations of the Working Group relate
(f) Comments submitted by interested parties.              to state law when it becomes effective at a future
                                                           date. In any event, the recommendations of the
    Furthermore,     in   developing    its                Working Group are based on an assessment of
recommendations, the Working Group made the                the expected status of state law on November
following assumptions:                                     12, 2002.

                                                           States Recommended for Certification of
                                                           Reciprocal Status
7
 Each completed reciprocity checklist and addendum            Based on its review, the Working Group
contained the following certification: “I hereby certify   concluded that the following 35 states meet or
that I am familiar with the laws, decisions, rules,        will meet the requirements for producer-licensing
regulations and other state action having the effect       reciprocity as set out in Section 321(c) of GLBA
of law in my jurisdiction and upon review of the same
                                                           by November 12, 2002, thereby preventing the
affirm that the responses to the above and foregoing
are true and correct. Moreover, I hereby further           implementation of a national licensing entity.
certify that I have the authority to waive those
producer licensing requirements as indicated
hereinabove and agree to waive said requirements in
order to meet the reciprocity standard for non-
resident producer-licensing as set forth in the Gramm-                           RQ
Leach-Bliley Act.”

www.naic.org                                                                                           fall 2002
8




            Visit the NAIC
            Research Division Web Site
            at
            www.naic.org/1research.htm

fall 2002                       NAIC Research Quarterly
                                                                                                                       9


                        Producer Licensing Legislation Implementation
                                    As of August 20, 2002

State                  Bill Number                                  Status          Eff. Date
Alabama                SB 427                                       Gov signed      Effective
Alaska                 HB 184                                       Gov signed      Effective
Arizona                SB 1366                                      Gov signed      Effective
Arkansas               Act 580                                      Gov signed      Effective
California             AB 2984                                      Gov signed      1/1/2003
Colorado               SB 34                                        Gov signed      Effective
Connecticut            SB 1096                                      Gov signed      9/1/2002
Delaware               SB 146                                       Gov signed      Effective
District of Columbia   Bill 14-223                                  In committee
Florida                HB 1841                                      Gov signed      10/1/2002
Georgia                HB 352                                       Gov signed      Effective
Hawaii                 SB 1068                                      Gov signed      Effective
Idaho                  HB 35                                        Gov signed      Effective
Illinois               HB 2994                                      Gov signed      Effective
Indiana                HB 1674                                      Gov signed      Effective
Iowa                   SF 276                                       Gov signed      Effective
Kansas                 SB 123                                       Gov signed      Effective
Kentucky               Passed 2000                                  Gov signed      Effective
Louisiana              HB 1557                                      Gov signed      Effective
Maine                  LD 1730                                      Gov signed      Effective
Maryland               SB 576                                       Gov signed      Effective
Massachusetts          HB 28                                        Gov signed      1/1/2003
Michigan               HB 5313                                      Gov signed      Effective
Minnesota              SF 1826                                      Gov signed      Effective
Mississippi            HB 658                                       Gov signed      Effective
Missouri               Reciprocity passed 2000/Uniformity: SB 193   Gov signed      Effective - 1/1/2003
Montana                HB 417                                       Gov signed      Effective
Nebraska               LB 51                                        Gov signed      Effective
Nevada                 AB 618                                       Gov signed      Effective
New Hampshire          Reciprocity passed 2000/Uniformity: HB 595   Gov signed      Both Effective
New Jersey             S 2428                                       Gov signed      When rules adopted, but by 11/12/02
New Mexico
New York               S 6701                                       Passed Senate
North Carolina         Reciprocity passed 2000/Uniformity: SB 318   Gov signed      Both Effective
North Dakota           SB 2144                                      Gov signed      Effective
Ohio                   SB 129                                       Gov signed      9/1/2002
Oklahoma               HB 1952                                      Gov signed      Effective
Oregon                 SB 268                                       Gov signed      Effective
Pennsylvania           SB 962, HB 1882                              In committee
Rhode Island           H 5783                                       Gov signed      Effective
South Carolina         HB 4096                                      Gov signed      1/31/2003
South Dakota           SB 44                                        Gov signed      Effective
Tennessee              HB 2889                                      Gov signed      1/1/2003
Texas                  SB 414                                       Gov signed      Effective
Utah                   SB 100                                       Gov signed      Effective
Vermont                H 186                                        Gov signed      Effective
Virginia               SB 913                                       Gov signed      9/1/2002
Washington             HB 1547                                      Gov signed      Effective
West Virginia          HB 4497                                      Gov signed      Effective
Wisconsin              Changes to regulations                       Adopted         Effective
Wyoming                SF 59                                        Gov signed      Effective

www.naic.org                                                                                                    fall 2002
10



     Medical Malpractice: The New Health Care
            Crisis or History Repeated?
                                    By Davin Cermak, Economist




   “Recent dramatic increases in premium for         overwhelming majority of these cases never reach
medical malpractice insurance coverage,              the settlement stage, but still incur considerable
withdrawals of insurance carriers from the           litigation costs that an insurer must cover.
medical malpractice market, and physicians’
protest strikes have brought the growing medical         More claims, higher litigation costs, higher
malpractice problem into the public arena.           settlement awards and smaller profits: The
Moreover, although evidence is scattered, there      result: The medical malpractice insurance
appear to have been large increases in the           market is again in crisis mode. The uncertainty
number and monetary value of malpractice             of the causes and costs of a claim make it difficult
claims and in the awards or settlements received     for insurers to profitably price the coverage and,
by patients injured as a result of negligence by     as a result, even large insurers are leaving the
providers of medical services”1.                     market. Combine fewer insurers with higher loss
                                                     costs and premiums typically spiral upward.
   This is how Michael D. Intrilligator and          Health care providers can’t provide health care
Barbara H. Kehner of the American Enterprise         without insurance and can’t provide it affordably
Institute for Public Policy Research began their     with insurance. What’s a public to do?
analysis of the medical malpractice
marketplace… in 1976.                                   Everyone wants to know what’s driving the
                                                     cost of “med mal” insurance, and everyone has a
   We’ve all heard the phrase “history repeats       theory on the solution to the problem. The issue
itself” so it should not be surprising that this     has even garnered the attention of the Bush
1970s analysis of the medical malpractice            Administration, which has issued a framework
marketplace is no less accurate in 2002. In recent   for improving the medical liability system.2 The
years, there has been a dramatic increase in         heart of this framework includes improving
medical malpractice insurance losses relative to     health care quality, placing caps on non-economic
premiums. While this may largely be due to a         damage awards and implementing alternative
significant increase in the frequency and severity   dispute resolution mechanisms, among other
of jury awards in medical malpractice liability      suggestions.
cases, there is evidence to show that the


                                                     2
                                                      United States Department of Health and Human
1
  Intrilligator, Michael D. and Kehner, Barbara H.   Services. Office of the Assistant Secretary for
“An Econometric Model of Medical Malpractice”, The   Planning and Evaluation. Confronting the New
Economics of Medical Malpractice, Washington, DC:    Health Care Crisis: Improving Health Care Quality
American Enterprise Institute for Public Policy      and Lowering Costs By Fixing Our Medical Liability
Research, 1978. 87.                                  System. Washington, DC: GPO, 2002. 18-23
fall 2002                                                                        NAIC Research Quarterly
                                                                                                         11


NAIC Research Division Study of the                     provide a variety of information about insurance
Medical Malpractice Insurance Market                    market activity. Countrywide trends can also be
                                                        used as a benchmark for examining state
   In response to numerous questions from state         experience.
regulators, federal government officials and the
media, the NAIC Research Division has initiated             Table 1—Total Number of Insurers
a study of the medical malpractice insurance                   (Countrywide) with Direct
marketplace. The research staff has also been
approached by the U.S. Department of Health
and Human Services—as well as other
academicians who have an interest in the issue—           Medical Malpractice Premium Written
about collaborating research efforts. Currently,                      (1991-2001)
NAIC staff is analyzing insurance premium and
loss trends and working on a reserve analysis of
                                                                  YEAR             NO. OF INSURERS
medical malpractice insurance. The analysis
                                                                   1991                   398
involves a review of property/casualty insurer
                                                                   1992                   407
data from the NAIC Annual Statement Exhibit                        1993                   417
of Premium and Losses By State (State Page)                        1994                   416
for years 1991 to 2001 including direct premium                    1995                   623
written (DPW), direct premium earned (DPE)                         1996                   613
and direct losses incurred; loss development,                      1997                   666
reserves and reserve adjustments.                                  1998                   646
                                                                   1999                   663
   While the NAIC study is in a preliminary                        2000                   613
stage, several trends that provide insight into                    2001                   613
current market activity can be extracted from
the data. However, in order to determine whether
this activity is a result of a normal business cycle,
or of some structural change in the medical               Table 1 shows the number of medical
liability coverage system, analyses of data other       malpractice insurers in the United States jumped
than annual statement data are required.                sharply from 1994-1995, then peaked in the late
Accordingly, NAIC staff is also compiling               1990s before starting to decline somewhat after
information about state requirements for medical        1997.
malpractice insurance (such as liability limits,
data reporting and closed-claims studies),                 Table 2 shows countrywide totals for DPW,
alternative coverage mechanisms (e.g., residual         DPE and losses, as well as countrywide loss
market mechanisms, patient compensation                 ratios (LR) for 1991-2001. During the 11-year
funds) and data pertaining to the litigation costs      analysis period, losses increased 144.2 percent,
of medical malpractice cases and the impact of          with a mean of $4.08 billion, while DPE grew
tort reforms.                                           only 41.4 percent, with a mean of $6.03 billion.
                                                        This clearly indicates that on a countrywide level,
Countrywide Overview                                    premium, while still greater than losses, has not
                                                        kept up with the growth in losses. Moreover,
   An analysis of countrywide aggregate data            much of the growth in losses during this time
over a period of years can identify trends that         (113.3 percent) has occurred since 1997.


www.naic.org                                                                                        fall 2002
12


     Table 2—Countrywide Medical Malpractice Insurance Premium and Losses

                                                     DIRECT                              DIRECT
                                                    PREMIUM                             PREMIUM                            DIRECT LOSSES         LOSS
              YEAR                                  WRITTEN                              EARNED                              INCURRED            RATIO
               1991                                5,041,116,742                       4,974,652,480                         2,815,117,139        56.59
               1992                                5,336,077,118                       5,229,476,485                         4,039,426,016        77.24
               1993                                5,451,861,069                       5,254,614,981                         3,525,005,041        67.08
               1994                                6,128,761,613                       5,986,568,310                         3,181,523,258        53.14
               1995                                6,174,433,133                       6,137,209,298                         3,330,613,605        54.27
               1996                                6,087,248,243                       6,027,958,481                         3,632,388,312        60.26
               1997                                5,949,762,287                       5,949,688,215                         3,222,735,496        54.17
               1998                                6,212,462,137                       6,218,164,376                         4,457,099,226        71.68
               1999                                6,181,174,156                       6,167,948,760                         4,659,896,010        75.55
               2000                                6,428,278,303                       6,373,039,337                         5,098,753,650        80.01
               2001                                7,602,831,870                       7,033,569,527                         6,874,050,778        97.73

            MEAN                                   6,054,000,606                       5,941,171,841                         4,076,055,321       68.61
            MEDIAN                                 6,128,761,613                       6,027,958,481                         3,632,388,312       60.26




  Figure 1—Relationship Between Direct Premiums Earned and Losses Incurred


                                          $8,000

                                          $7,000
               US Dollars (in Millions)




                                          $6,000
                                                                                                                                      DIRECT
                                                                                                                                      PREMIUM
                                          $5,000                                                                                      EARNED

                                          $4,000                                                                                      DIRECT
                                                                                                                                      LOSSES
                                                                                                                                      INCURRED
                                          $3,000

                                          $2,000
                                                    1991
                                                           1992
                                                                  1993
                                                                         1994
                                                                                1995
                                                                                        1996
                                                                                               1997
                                                                                                      1998
                                                                                                             1999
                                                                                                                    2000
                                                                                                                           2001




                                                                                       Year



Figure 1 shows the gap between DPE and incurred losses graphically. This gap remained relatively
wide until 1997 when it began to narrow rapidly.

fall 2002                                                                                                                                NAIC Research Quarterly
                                                                                                                            13


                                                       Figure 2—Countrywide Loss Ratio
               INCURRED LOSS AS % OF NET                         1991 - 2001




                                           100.00
                    EARNED PREMIUM




                                            80.00

                                            60.00

                                            40.00

                                            20.00

                                             0.00
                                                    1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
                                                                             YEAR




   Figure 2 shows the change in the countrywide                            By-State Analysis
loss ratio (DPE/losses *100) over the same period.
While the loss ratios remained more or less                                   The by-state data, shown in Appendix 1,
steady throughout much of the decade, they have                            includes data from all 50 states, Washington,
consistently risen since 1997.                                             D.C., Guam, Puerto Rico and the U.S. Virgin
                                                                           Islands. Similar to the experience countrywide,
   Overall, the countrywide medical malpractice                            Table 3 shows an increase in the mean and
market shows obvious signs of hardening over                               median of DPE and losses respectively, as well
the past five years, with a reduction in the                               as in loss ratios over the analysis period. Because
number of insurers able to exist in the market                             of the differences in DPE and loss volume from
and narrowing prospects of potential profits as                            state to state, median values more closely
evidenced in the increasing loss ratio.                                    resemble the true central tendency of the
                                                                           distribution of states. In other words, it more
                                                                           closely reflects what most people would consider
                                                                           the “average” state experience, as it is unaffected
                                                                           by extreme values.
www.naic.org                                                                                                           fall 2002
14


       Table 3—Mean and Median Direct Premiums Earned and Losses, By State


                                                                  DIRECT PREMIUM                                              DIRECT LOSSES                                   LOSS
            YEAR STATE                                                    EARNED                                                  INCURRED                                   RATIO
                 MEAN                                                     92,123,194                                                52,131,799                                 56.59
            1991
                 MEDIAN                                                   40,863,321                                                22,044,075                                 53.95
                 MEAN                                                     96,842,157                                                74,804,185                                 77.24
            1992
                 MEDIAN                                                   38,800,826                                                21,718,619                                 55.97
                 MEAN                                                     97,307,685                                                65,277,871                                 67.08
            1993
                 MEDIAN                                                   39,588,951                                                22,763,229                                 57.50
                 MEAN                                                    110,862,376                                                58,917,097                                 53.14
            1994
                 MEDIAN                                                   47,718,398                                                23,349,976                                 48.93
                 MEAN                                                    113,652,024                                                61,678,030                                 54.27
            1995
                 MEDIAN                                                   47,658,979                                                31,691,888                                 66.50
                 MEAN                                                    111,628,861                                                67,266,450                                 60.26
            1996
                 MEDIAN                                                   46,413,910                                                31,198,355                                 67.22
                 MEAN                                                    110,179,411                                                59,680,287                                 54.17
            1997
                 MEDIAN                                                   44,522,708                                                23,882,518                                 53.64
                 MEAN                                                    115,151,192                                                82,538,875                                 71.68
            1998
                 MEDIAN                                                   47,024,365                                                38,580,835                                 82.04
                 MEAN                                                    114,221,273                                                86,294,371                                 75.55
            1999
                 MEDIAN                                                   48,580,856                                                31,424,247                                 64.68
                 MEAN                                                    118,019,247                                                94,421,364                                 80.01
            2000
                 MEDIAN                                                   53,025,192                                                33,113,996                                 62.45
                 MEAN                                                    130,251,288                                               127,297,237                                 97.73
            2001
                 MEDIAN                                                   58,681,472                                                57,726,507                                 98.37


                Figure 3—Number of States With Loss Ratios > 100.00

                                    25


                                    20                                                                                                                                  20
                 Number of States




                                                                                                                                                          16
                                    15


                                    10
                                                                                                                                     9         9

                                                             6
                                     5                                                                                  5
                                                                                                            4
                                                                                              3
                                                2                        2         2
                                     0
                                         1991

                                                    1991
                                                           1992

                                                                  1992
                                                                         1993
                                                                                1994
                                                                                       1994
                                                                                              1995
                                                                                                     1996
                                                                                                                1996
                                                                                                                       1997
                                                                                                                              1997
                                                                                                                                     1998
                                                                                                                                            1999
                                                                                                                                                   1999
                                                                                                                                                          2000
                                                                                                                                                                 2001
                                                                                                                                                                         2001




                                                                                                       Year


fall 2002                                                                                                                                                               NAIC Research Quarterly
                                                                                                           15


    Also during the analysis period, the number        current reluctance by some insurers to offer the
of jurisdictions with loss ratios exceeding 100 has    product. There is an undeniable need to assess
grown substantially since 1997, as can be seen         the impact of regulatory policies, tort reforms,
in Figure 3.                                           government proposals and other measures that
                                                       reduce the uncertainty of loss and loss
   It should be noted that because losses in           adjustment expenses and that limit barriers to
medical malpractice insurance typically vary           competition. Implementing those that help
from one year to the next, a significant portion       reduce the volatility of claims frequency and
of losses are estimated for reserving purposes.        severity, promote healthy competition among
As a result, some states may show negative             insurers and still provide adequate liability
aggregate losses as a result of reserve                protection for consumers should ultimately
adjustments from prior year(s) losses, which           increase the availability of coverage and help
result in negative loss ratios for that time period.   stabilize price. If history is truly indicative of the
The negative adjustments do not represent a            future, hopefully lessons learned will guide us
large portion of the overall market, so their          toward sustainable solutions.
impact on the countrywide, mean and median
calculations is minimal.                                   “The second reason for the cooling down [of
                                                       the medical malpractice insurance market]
The Economic Business Cycle                            comes from quite a different source. One of the
    The analysis begins to paint an economic           major sources of distress in 1976 (and even more
picture of the typical business cycle for medical      so in 1975) was the sharp and unanticipated
malpractice insurance. During the early years          increase in medical malpractice insurance
of the analysis period (approximately 1991-1995),      premium rates, coupled with the withdrawal of
insurers were entering the marketplace to take         many insurance firms from the market, and the
advantage of the significant difference between        bankruptcy, or near bankruptcy, of some that
earned premium and losses—which represented            remained. The new insurance rates required
potentially attractive profit margins. As the          major short-term adjustments, and they fed fears
marketplace became more saturated and                  that further increases of similar dimensions were
competition grew more intense, insurers were           in the offing. Now that problem has crested.
managing the price of insurance (either limiting       Premiums generally have been relatively stable,
rate increases or even lowering rates) in order to     certainly as compared with inflation, and in some
gain market share. As competition increased and        instances have declined. Private physicians and
profit margins got smaller, some insurers began        medical institutions have had a chance to ‘catch
to exit the marketplace and those remaining            up’ on costs and to make necessary adjustments
raised their prices. If business cycle theory holds,   in their methods of doing business, again without
as the remaining insurers increase prices, the         any formal independent changes in the law.”3
differences between earned premium and losses          Robert B. Helms, The Economics of Medical
will increase, thereby encouraging insurers to         Malpractice (1976)
again enter the market.
Further Research is Always Necessary
   While the cyclic behavior of the medical
malpractice insurance market is not unexpected,
the speed with which loss levels outpace               3
                                                        Helms, Robert B. Preface. The Economics of Medical
premiums, and the array of causes, emphasize           Malpractice, Washington, DC: American Enterprise
insurer difficulty in pricing and help explain the     Institute for Public Policy Research, 1978.

www.naic.org                                                                                          fall 2002
16



                                   Mold: The Fuzzy Foe
                                                By NAIC Staff




B  y now nearly everyone has heard about the            paid; or assisting insurance companies in
country’s problems with mold and everyone has           denying claims and, in turn, getting paid.
heard someone discuss the issues. On one side
are the consumers—people with homes and                    Meanwhile, the media is doing what it does
businesses that are deteriorating because of            best ... spreading the word. Mold is becoming a
mold, and whose health is being compromised to          hot topic, and, like so many other topics that
a degree now being assessed.                            suddenly receive an abundance of attention in
                                                        the press, mold is becoming a national cause
   On another side are the mold-removing                celebre and everyone is getting involved—
professionals—mold remediators—who provide              customers, lawyers, insurance regulators, the
their specialized services for fees that can be hard    insurance industry, builders, health analysts
for the average person to pay without insurance         and, of course, politicians.
coverage.
                                                        So what is everyone doing about mold?
    Then there are the insurers, caught in the
middle because they never intended their policies
to cover mold damage in the traditional sense                                    Mold Remediators
(i.e., because somebody was negligent) and                 Who’s making $$$?     Lawyers
believed the policy language made that clear.
                                                                                 The Media
They are trying to explain that position to judges
and juries, but some recent verdicts indicate
there is not much sympathy. More specific policy           Who’s losing $$$?     Insurers
language is being drafted, but in the meantime                                   Consumers
insurance companies often have to bite the bullet
and pay the claims.                                                              Insurance Regulators
   Finally, there are the lawyers who are in the                                 The Insurance Industry
                                                           Who’s trying to do
desirable position of either assisting consumers                                 Politicians
                                                           something about it?
in getting paid for damages and, in turn, getting                                Health Analysts
                                                                                 The Media
                            Consumers
            Remediators




                                            Lawyers




                                                           Insurer revisions to insurance policy language
                          MOLD CLAIMS                   have been submitted to the filing departments
                                                        of every insurance regulatory agency in the
                                                        country. Insurance regulators are scrutinizing
                             Insurers                   those changes, considering the ramifications of
fall 2002                                                                          NAIC Research Quarterly
                                                                                                    17


modifications and generally coordinating            comfortable in places a person can’t even see,
research efforts. Their goal is to determine an     much less neglect.
appropriate balance between the needs of
insurance consumers to have property, liability        The “modernization of things” has also
and health care protection, with the needs of       brought about improvements in a doctor’s ability
insurers to charge an appropriate rate for the      to relate illness to one’s proximity to moldy
coverage or exclude coverage entirely because       places. Air vents spread mold spores and people
certain mold damage is uninsurable.                 get sick in places they don’t even live. Few
                                                    considered a moldy office building to be literally
   Brainstorming sessions are in full force with    “sickening” before the latest medical research
public hearings and debates on questions like       began to associate the two.
should any, or at least some, types of mold
                                                       The modernization of things also means any
coverage be offered? At a higher price? On an
                                                    bit of news anybody knows can be spread around
optional basis? With a cap? Under what policies?
                                                    the world faster than an errant mold spore lands
Property/liability? Health? Life? Should the
                                                    on your nose. No offense to living creatures but,
government foot the bill for all or part of it?
                                                    like mold, news can get uglier when it spreads,
Should there be a mold insurance program like
                                                    and news related to any cause of illness will get
the federal flood insurance program, or a
                                                    people everywhere all riled up.
catastrophe mold fund like the one proposed for
terrorism? Should states decide, or should it be       The modernization of things also means
a federal government decision?                      lawyers can do more research, faster, to figure
                                                    out more reasons and ways to get insurers to pay
                                                    for the insurance claims of their clients.

                                                       Insurance regulators understand the
                                                    problems and are working on them, but changing
                    =                               a standard method of doing anything takes time;
                                                    changing a lot of different standard methods of
                                                    doing things takes a lot of time. While the issues
                                                    are debated, however, there is little doubt the
               Mold is ancient.                     mold dilemma will (ahem) “grow.”

Why is the problem new, when mold is old?

   Mold has been around for a million years. The
biggest question many have is why everybody is
just now getting all riled up. The simple answer
is modernization.

   Construction methods are very different now
than they were a million years ago. Modern
materials, modern design and modern prices for
mold prevention and removal have changed the        Source:
way mold gets around. A property owner doesn’t      New York
                                                    Daily News
necessarily have to be negligent anymore in order
                                                    September 10,
for mold to grow. Mold has become perfectly
                                                    2001
www.naic.org                                                                                   fall 2002
18



                     Jury Jury Awards 1994 vs 2000
             Average AverageAwards 1994 vs. 2000
                                       Increasing abuse of tort system has created an
                                       ideal environment for growth of mold suits                                  6,817
                       $7,000

                       $6,000                     1994                                     2000

                       $5,000
              ($000)




                       $4,000                                                          3,482         3,566

                       $3,000

                       $2,000                     1,727                                                       1,744
                                   1,168                                           1,140         1,185
                       $1,000               759                              698
                                 419                                   333
                                                           187 269
                          $0
                                 Overall     Business      Vehicular   Premises     Medical       Wrongful      Products
                                            Negligence     Liability   Liability   Malpractice     Death        Liability

              Source: Jury Verdict Research; Insurance Information Institute.

                       HO Insurance Costs
                       & Cost of Home Repairs Home Repairs
                          HO Insurance Cost & Cost of


                                1999
                                2000                                          7.0%
                                2001
                                                                                                                   6.0%
                                                          5.3%

                                                                   4.1%
                                3.4%
                                           2.8%
                       2.2%                                                                              2.4%
                                                                                           1.5%




                            Overall CPI                      Home Repairs                        HO Insurance*
            Source: US Department of Commerce, Insurance Information Institute
            *HO insurance cost increase for 2001 is III estimate.
fall 2002                                                                                                    NAIC Research Quarterly
                                                                                                                                                                                        19

         Homeowners Combined RatioRatio
             Homeowners Insurance Combined

              160




                                                158.4
                                                                    On average, homeowners insurers paid out $1.18 for every
                                                                           $1.00 they took in between 1991 and 2001
              150


              140


              130




                                                                                                                                                                         126
                                                                                                         121.7
                                                                           118.4
                        117.7



                                             115.7




              120




                                                                                                                                                                             116
                                                                 113.6




                                                                                               112.7




                                                                                                                                                              111.4
                                                                                                                                                             110.0
                                                                                                                                         109.4
                             108.8




                                                                                108.4




                                                                                                                                                   108.2
                                                                                                                                                   107.8
                                                            106.9




                                                                                          106.4


                                                                                                              105.8




                                                                                                                                       105.6
              110



                                                                                                                             101.6
              100                                                                                                            101.0
                      1991           1992            1993                1994           1995           1996            1997          1998        1999      2000       2001

                Source: NAIC                                                              Homeowners                             All Lines Combined Ratio



              Underwriting Gain (Loss) 1990-2001
              Property/Casualty Underwriting Gain (Loss) 1990-2001

                       $10

                        $0

                      ($10)
         $ Billions




                      ($20)

                      ($30)

                      ($40)

                      ($50)

                      ($60)
                                      1990

                                                     1991

                                                                   1992

                                                                              1993

                                                                                          1994

                                                                                                       1995

                                                                                                                      1996

                                                                                                                                1997

                                                                                                                                         1998

                                                                                                                                                   1999

                                                                                                                                                           2000

                                                                                                                                                                  2001




              Source:NAIC

www.naic.org                                                                                                                                                                       fall 2002
20


                          State Regulation
                         Insurer filings to exclude or limit coverage
                         have been submitted in almost every state




                  Legislation
            StateState Legislation
                   Arizona
                   California               Massachusetts
                   Connecticut              Nevada
                   Florida                  North Carolina
                   Illinois                 New Jersey
                   Indiana                  New York
                   Maryland                 Texas



                  Mold-related laws are being considered
                  across the country
fall 2002                                                    NAIC Research Quarterly
                                                                                                   21


           Regulatory Controls and the Revised
           Information Systems Questionnaire
                             By Jackie Brewer, Programmer Analyst I,
                              Information Systems Quality Assurance




   The 2002 issue of the Financial Examiner’s       including the American Accounting Association,
Handbook contains the revised Exhibit C, titled     the American Institute of Certified Public
the Information Systems Questionnaire (ISQ).        Accountants, the Institute of Internal Auditor,
It is written in plain English rather than          the Institute of Management Accountants and
technical language and is designed to improve       the Financial Executives. The Internal Control-
the efficiency and effectiveness of information     Integrated Framework outlined underlying
system examinations of insurance companies for      precepts utilized today for effective internal
financial examinations.                             controls in business. Many insurance companies
                                                    have implemented controls consistent with those
   Information systems controls are particularly    outlined in the Internal Control-Integrated
important because they have a direct impact on      Framework.
the completeness, accuracy and existence of the
financial data relied upon by company                  While COSO is the standard used in CPA
management every day. The ISQ has been              examinations, the Control Objective for
revised to be consistent with the NAIC’s            Information and related Technology (CoBIT) has
movement toward utilization of a risk-based         built and redesigned the standard for
examination process, whereby controls are tested    information systems examinations. The CoBIT
and relied upon, thereby reducing reliance on       standard helps in understanding and managing
substantive tests. Although small, mid-sized or     the risks associated with information and
large insurance companies may implement             information systems. Information systems work
information systems differently, the same           well when managed by a set of four naturally
principles apply to each company irrespective of    grouped domains:
the size of the company. The questions in the
ISQ are sufficiently flexible in structure to         a)   Planning and organization;
provide latitude for the wide variety of sizes of     b)   Acquisition and implementation;
insurance companies, from a small manually            c)   Delivery and support; and
based company to a large company that has a           d)   Monitoring Information Systems
nationwide distributed computer system.                    processes.

   The ISQ includes many of the internal control       Control activities in information systems
concepts found in the 1992 industry-standard        involve day-to-day routines in the IS
publication, Internal Control-Integrated            environment. The central objective in creating
Framework. This publication was prepared by         a good internal IS control environment is to link
the Committee of Sponsoring Organizations           the four parts of control domains, the daily
(COSO) of the Treadway Commission. There            processes and activities with the insurance
were five sponsoring organizations in COSO          company’s operational processes and activities.

www.naic.org                                                                                  fall 2002
22


Examinations for information systems need to            understanding of current industry technical
move beyond the business process and review             terminology as it relates to regulatory controls.
controls in the technology systems inside and
outside of the predictive models. Basically the            One often overlooked and important page in
objective with internal controls in Information         the ISQ is the first page, which contains
Systems is to facilitate the accomplishment of          instruction notes for examiners. The first
business objectives and requirements for                instruction note indicates the ISQ is to be
information with technology platforms.                  completed by the company’s information systems
                                                        manager. The information systems manager
   The vast majority of the questions in the            should be expected to answer relevant scoping
revised ISQ are designed to elicit positive             notes throughout the ISQ. The second
responses where negative answers are subject            instruction note indicates that in cases where a
to additional scrutiny by the regulatory IS             company does not have documentation, or it is
specialist for lack of controls in areas that clearly   not available, the company needs to provide a
should have controls in place. Insurance                demonstration of the control for the regulatory
companies are required to submit documentation          IS Specialist or an example of the process.
to the regulatory IS specialist to substantiate
that adequate controls are in place and                    The third instruction note recommends the
appropriately managed within the insurance              time frame for the review is to be limited to the
company. However, the positive/negative design          latest 12 to 18 months and should also include
of the ISQ should not lead to the regulatory IS         the actual fieldwork in that time frame. The
specialist allowing insurance companies to              fourth instruction note indicates questions in the
answer only “yes” or “no” without adequate              ISQ that are answered, should be for financially
explanations where appropriate. In an ideal             significant information systems only. For the
world, IS personnel at insurance companies              ISQ, financially significant questions are defined
should complete the ISQ and return it to the            as computer software and hardware. This
regulatory IS specialist before fieldwork for a         includes both system and application programs
financial examination begins.                           that perform automated processing of a
                                                        financially significant account balance, including
   Two enhancements in the ISQ include                  e-business systems. Financially significant
guidance points and definition of terms. The            systems are normally identified as critical in the
guidance points are designed to provide the             insurance company’s business continuity plan.
regulatory IS specialist with technical
terminology and processes that may be new to               The fifth instruction note advises the
the individual examiners experience. The                regulatory IS specialist to review the narrative
guidance points also provide examples of tests          responses by the company to each question in
to perform and follow-up questions to ask during        each section along with the documentation
interviews with insurance company IS managers.          provided by the company. One special note
The regulatory IS specialist can use these              should be made of the fact that programming
examples to ask well-directed, meaningful               controls will be more subject to attribute
questions that are understood by everyone               sampling. It is advised that the regulatory IS
involved and result in a complete picture of the        specialist select program change documents, and
control environment for the examination. The            determine the sample size based on the level of
Definition of Terms for E-Business is a new             risk initially identified from the response on the
addition to the ISQ to facilitate better                ISQ.


fall 2002                                                                          NAIC Research Quarterly
                                                                                                     23


   The sixth and final instruction note reaffirms       duties to help prevent errors or potential
the fact that information system testing should         fraud by employees. In smaller companies,
be performed across all financially significant         the separation of duties may be more difficult
applications. That instruction note also indicates      to achieve; however, alternate controls still
that one completed ISQ per company should be            need to be implemented to prevent internal
the general practice by regulators. Furthermore,        problems. There should also be a strong
some controls are conducive to sampling or audit        management and reporting control system.
trail inspection, but there are others, such as
inspecting the data center at the insurance          C) Changes to Applications: The emphasis is
company, that must be done by personal                  on the controls that should be in place to
observation of the regulatory IS specialist.            change production applications. Users that
                                                        request changes should have their requests
   There are thirteen sections in the ISQ, listed       evaluated and handled in a properly
in alphabetic order from A through M, in                authorized manner. There should be
consecutive order. The only exception is K, which       adequate records maintained to document all
has been removed from use in the revised ISQ.           change requests and the actions taken for all
                                                        change requests. Technical documentation
                                                        should also be updated to correspond to
 SECTION                     NAME
                                                        production applications as well.
 Section A     Management Controls
 Section B     Organizational Controls
 Section C     Changes to Applications               D) System and Program Development: One of
 Section D     System and Program Development           the more complex sections of the ISQ, this
 Section E     Operations                               section addresses the insurance company’s
 Section F     Processing Controls                      use of a methodology called the System
 Section G     Documentation Requirements               Development Life Cycle. The focus in this
 Section H     Outside Service Center Controls          section centers on senior management’s
 Section I     Logical and Physical Security            involvement with controls that regulate the
 Section J     Contingency Planning                     documentation of business requirements, the
 Section K     Currently not in use                     development of system plans and the
 Section L     E-Business Controls                      selection, design, development, testing and
 Section M     Wide Area Network                        implementation of any new, financially
                                                        significant company.
A) Management Controls: Focuses on the level
   of involvement from senior management in
                                                     E) Operations: This section is complex and
   information systems functions. It also
                                                        focused on controls for the data center in the
   addresses the relationship between an
                                                        insurance company for physical controls to
   insurance company’s information systems
                                                        ensure only authorized personnel have access
   and business strategies. The underlying
                                                        to the data center. It also addresses logical
   premise in this section is that the higher the
                                                        controls for the equipment and data on the
   level of senior management involvement in
                                                        equipment in the data center. The duties of
   IS functions, the better the management
                                                        the operations staff are reviewed to ensure
   control system will function.
                                                        adequate controls are in place to prevent theft
                                                        or fraud. Recovery from backups in case of
B) Organizational Controls: This section                equipment and/or data loss is outlined. It is
   reinforces the necessity for separation of           a comprehensive evaluation of the data center


www.naic.org                                                                                    fall 2002
24


     and it is strongly recommended that the            financially significant systems. Internal
     regulatory IS specialist tour the data center      controls need to be in place to prevent
     to physically check many of the key                disgruntled current or former employees from
     components of data center security.                compromising data and security.

F) Processing Controls: Although this section is     J) Contingency Planning: It is important for
   short, there are critical questions relevant to      insurance companies to have a business
   data transmission, storage of checks and             continuity plan in place and a disaster
   audit trails for tracking purposes.                  recovery manual that is current, up-to-date
                                                        and stored off site in case the facility is
G) Documentation Requirements: This section             destroyed. The regulatory IS specialist
   provides for important points to review in           should check to make sure the disaster
   such areas as documentation controls                 recovery manual has been updated for
   (including the existence of a standards              personnel and system changes that have
   manual) and mandatory documentation for              occurred since Y2K.
   applications, system definitions and program
   file definitions.                                 K) Currently not in use.

H) Outside Service Center Controls: This section     L) E-Business Controls: This is a new and
   may not apply to all insurance companies.            important addition to the revised ISQ. This
   Some organizations complete all of their own         section reviews an insurance company’s use
   computer processing, while other companies           of the Internet to conduct business. One
   outsource some or all of their computer              important issue outlined in this section is the
   processing. The controls in this section are         control to ensure the privacy of online
   designed for outside vendors who provide the         monetary transactions and storage of
   processing for the insurance company. It is          customer financial data, such as credit card
   strongly recommended the regulatory IS               information. As more insurance companies
   specialist do a physical examination of the          use the Internet to expand their base of
   vendor’s data center to ensure there are             business and provide customer service, the
   adequate security measures in place, just as         importance of a careful examination of the e-
   an inspection of the data center of an               business controls in the insurance company
   insurance company would be completed.                cannot be understated. It is so important that
                                                        definitions of technical terms were included
I) Logical and Physical Security: If the                in this section specifically to provide
   insurance company has one centralized                assistance to the regulatory IS specialist who
   processing center, then the questions for this       might not be familiar with the terms or
   section will only need to be answered once.          meanings.
   However, if the insurance company has a
   decentralized distributed system in several       M) Wide Area Network: This section looks at the
   locations, then the questions will need to be        insurance company’s use of Wide Area
   answered for each location, because each             Networks and the public Internet. It also
   location may have separate processing                emphasizes senior management’s involve-
   environments. Security is an important issue         ment in ensuring the integrity of the
   that must adequately prevent the spread of           company’s security architecture that is
   viruses and the entry of hackers into                related to Internet connections.


fall 2002                                                                       NAIC Research Quarterly
                                                                                                          25


     In conclusion, the ISQ is a well-designed and       JACKIE BREWER, PROGRAMMER ANALYST I, INFORMATION
detailed tool to facilitate better information        SYSTEMS QUALITY ASSURANCE JOINED THE NAIC IN 2000.
systems examinations. It is structured to ensure      PRIOR TO HER CURRENT POSITION SHE WAS THE SENIOR
up-to-date controls are in place utilizing a risk-    COMPUTER AUDIT SPECIALIST FOR THE NAIC. BREWER
based methodology. Cutting-edge technology,           MANAGED THE DATA CENTER AT THE UNIVERSITY OF KANSAS
terminology and definitions are incorporated into     MEDICAL CENTER, AND HAS WORKED IN COUNTY AND STATE
the ISQ to assist the regulatory IS specialist. The   GOVERNMENT INFORMATION SYSTEMS-RELATED MANAGEMENT
ISQ is also flexible enough for use in small or       POSITIONS FOR MORE THAN 17 YEARS.
large insurance companies. The utilization of
good information systems controls facilitates the        BREWER   EARNED HER UNDERGRADUATE DEGREE IN
accomplishment of business objectives and             COMPUTER INFORMATION SYSTEMS AND A MASTER'S DEGREE
requirements for information with technology          IN HUMAN RESOURCES, BOTH FROM   OTTAWA UNIVERSITY. SHE
platforms. Information systems controls are an        EARNED A DOCTORATE DEGREE IN MANAGEMENT AND
important aspect of the financial examination         ORGANIZATION FROM  CAPELLA UNIVERSITY. BREWER IS ALSO
process because of the direct impact on               A MEMBER OF THE ADJUNCT FACULTY OFCAPELLA UNIVERSITY
completeness and accuracy of financial data used      AND TEACHES A VARIETY OF INFORMATION SYSTEMS COURSES.
as the basis for an insurance company’s business
decisions.




NAIC Statistical Reports can be ordered from the

                                   NAIC Publications Catalog 2002
                                                  Contact the NAIC Publications Department via
                                                       phone: 816-783-8300
                                                       fax: 816-460-7593
                                                       e-mail: pubdist@naic.org.

                                                  You may view our entire product line at
                                                       http://www.naic.org/1pubcat/.




www.naic.org                                                                                         fall 2002
26



  State Average Expenditures & Premiums For
    Personal Automobile Insurance In 2000
                                            By NAIC Staff




   This report provides estimated state average      collision) and adds these separate averages
expenditures and average annual premiums per         together to provide a rough estimate of the
insured vehicle for private passenger automobile     representative average premium for an insured
insurance for the years 1996-2000. These             vehicle carrying all three types of coverage. The
statistics provide approximate measures of the       average expenditure measures what consumers
relative cost of automobile insurance to             actually spent for insurance per insured vehicle,
consumers in each state. The data for prior years    while the combined average premium attempts
were adjusted to reflect the most up-to-date         to measure the hypothetical expenditure for an
information available as of the end of 2001.         average car, assuming all three basic types of
Therefore, the historical averages may not           coverage are purchased. The relative amounts
exactly match information published in prior         of separate coverage purchased as well as a
versions of this study.                              number of other factors affect the average
                                                     expenditure in a state. For instance, in a state
   The underlying data were obtained primarily       with a robust economy, more consumers are
from the National Association of Independent         likely to purchase new vehicles, and new vehicles
Insurers, the Insurance Services Office, the         are more likely to be insured for physical da mage
National Independent Statistical Service and the     than older vehicles, thus increasing the average
American Association of Insurance Services.          expenditure per insured vehicle. The combined
Data were also obtained from the California          average premium per insured vehicle is less
Department of Insurance, the South Carolina          affected by these differences, but will still
Department of Insurance, the Texas Department        respond to general economic conditions.
of Insurance and the Massachusetts
Commonwealth Automobile Reinsurers. The                 Note that this report uses aggregate written
assistance of these organizations in providing       premiums and aggregate written car-years for
data for this report is greatly appreciated.         its calculations without differentiating among
                                                     the states on measures such as traffic density,
   The state average expenditure per insured         other traffic conditions, tort liability laws,
vehicle is defined as the total written premiums     financial responsibility requirements, regulatory
for each coverage divided by the liability written   rate approaches, demographics and other factors.
car-years in that state. This assumes that all       Therefore, caution should be exercised when
insured vehicles carry liability coverage but do     making direct comparisons between states.
not necessarily carry collision and/or               Because of the many different factors that affect
comprehensive coverage. The state combined           average premiums and average expenditures,
average premium per insured vehicle, on the          these measures do not indicate the relative
other hand, takes the average premiums for each      efficiency of the auto insurance markets in
major coverage (liability, comprehensive and         various states.

fall 2002                                                                       NAIC Research Quarterly
                                                                                                         27


   In 2000, the nationwide average expenditure           •   per capita disposable income
was $687, an increase of 0.32 percent over 1999.         •   rate filing laws
Eighteen states and the District of Columbia had         •   liability insurance requirements
an average expenditure greater than the national         •   auto laws (seat belt, speed limits, etc.)
average, while 32 states had an average
expenditure less than the national average.
                                                          Insurance prices are determined primarily by
Statistically, this means that a few high average
                                                      the cost of claims filed by the insured. Many of
expenditure states skew the national average
                                                      these cost factors can impact prices not only
upward. The median average expenditure, as a
                                                      between states, but also between communities
comparison, was $654. In 2000, four states had
                                                      and neighborhoods, making price comparisons
average expenditures less than $500, 34 states
                                                      between states extremely complex. There are
had average expenditures between $500 and
                                                      certain broad characteristics that contribute to
$750, and 12 states and the District of Columbia
                                                      the frequency and severity of loss costs, and
had average expenditures greater than $750 per
                                                      hence premiums, in a particular state. For
insured vehicle.
                                                      instance, “general economic conditions” may
                                                      affect the price of coverage, but no direct measure
   The report is divided into several tables. Table   of this phenomenon exists. Although these broad
1 shows average expenditures and average              characteristics cannot necessarily be measured
premiums in 2000 by state, including separate         directly, measurable data can be used as
averages for liability, collision and                 imperfect substitutes to approximate their
comprehensive coverage. Tables 2 through 6            effects. For example, the average annual income
show average expenditure and average premium          per capita can serve as a proxy for the general
trends by state for the years 1996-2000. Tables       level of economic activity or wage and price levels
7(a) through 7(e) provide the underlying data on      in a state. The number of cars per square mile
written premiums and written car-years by state.      can serve as a proxy for the relative degree of
                                                      traffic congestion. By assigning proxy
Factors Affecting a State’s Average                   measurements to measure broad characteristics,
Expenditure and Average Premium                       factors affecting automobile insurance premiums
                                                      can be identified.
   Beginning in 2001, the NAIC resumed annual
publication of the Auto Insurance Database                Three variables identified as highly correlated
Report. Available as a separate publication, this     with average premiums between states are
report provides a comprehensive set of data that      graphed on the following pages. The graphs show
measure factors affecting average expenditures        these variables for the 10 highest average
and premiums for automobile insurance on a            expenditure states on the left of the graph and
state-by-state basis. Some important factors          for the 10 lowest average expenditure states on
include:                                              the right. These graphs show that the average
   • average underwriting and loss                    annual income per capita is usually greater in
    adjustment expense factors                        the 10 highest average expenditure states than
   • relative amounts of coverages purchased          in the 10 lowest average expenditure states. This
   • accident rates                                   suggests that the wage and price levels in a
   • traffic density                                  particular state have a positive relationship with
   • vehicle theft                                    the premiums paid for auto insurance in that
   • auto repair costs                                state. In other words, states having a higher
   • population density                               average expenditure for automobile insurance

www.naic.org                                                                                      fall 2002
28


tend to have a higher average income per capita.                                                                              The Consumer Price Index (CPI) for all items
Similarly, the graphs show that traffic density                                                                           measures the cost of a fixed set of consumer goods
is relatively greater in the 10 highest average                                                                           and services purchased by a set population.
expenditure states, suggesting a positive                                                                                 Similarly, the CPI for automobile insurance is
relationship between traffic density and                                                                                  an index measuring the cost of automobile
insurance prices. Because of the complexity of                                                                            insurance to consumers over time. The annual
the numerous relationships in determining these                                                                           rate of change in the average premium and
expenditures, it may be that the primary cause                                                                            average expenditure will vary from the annual
of higher premiums in a state may not be the                                                                              rate of change in the automobile insurance price
observed variable or the characteristic that it is                                                                        index. The average premium and average
intended to proxy, but rather other factors that                                                                          expenditure are affected by changes in insurance
influence, or are highly correlated with, the                                                                             prices as well as the choices individual consumers
observed variable. The graphs shown in this                                                                               make as to the types and amounts of insurance
report indicate that high premium states tend                                                                             purchased, whereas the latter holds the amount
to be highly urban, with high wage and price                                                                              of insurance constant to measure price changes
levels and high traffic density-all of which                                                                              in a uniform product.
contribute to higher costs.



                                                                       Percent of State Population Living in Metropolitan Areas - 1990 U.S. Census
                                                        100%   100%
                                               100.0%
                                                                    96%           96%
                                                                                                     94%
                                                                           92%
                                               90.0%                                                              87%
                                                                                               85%
                                                                                        83%
                                               80.0%
                                                                                                            75%
       % of Population in Metropolitan Areas




                                                                                                                                            68%
                                               70.0%


                                               60.0%
                                                                                                                                      55%
                                                                                                                                                  51%
                                               50.0%
                                                                                                                                                                                44%
                                                                                                                                                                                            42%
                                               40.0%
                                                                                                                                                              36%                     33%
                                                                                                                                                                    31%
                                                                                                                                                                          30%
                                               30.0%
                                                                                                                                                        24%

                                               20.0%


                                               10.0%


                                                0.0%
                                                         DC    NJ   MA NY         CT     DE    NV     RI    LA     AZ                 KS    WI    NE    MT    ME    ID    WY    IA    SD    ND
                                                           Source: U.S. Bureau of the Census Internet Site [http://www.census.gov/]




fall 2002                                                                                                                                                            NAIC Research Quarterly
                                                                                                                                                                                                                                                                     29


                                                                                                    M i l li o n s o f M il e s D r iv e n p e r M i le o f R o a dw a y

                                 3




                               2 .5   2 .4 5




                                                1 .8 7
                                 2
  Miles Driven (in Millions)




                                                            1 .5 0               1 .4 8    1 .4 3
                               1 .5
                                                                                                                  1 .3 8
                                                                      1 .1 4


                                 1
                                                                                                                                          0 .9 0

                                                                                                                                0 .6 7
                                                                                                                                                                                                      0 .6 3
                                                                                                     0 .4 7                                                          0 .5 1
                               0 .5
                                                                                                                                                                                                               0 .2 9    0 .3 0       0 .2 6
                                                                                                                                                           0 .2 1              0 .1 9
                                                                                                                                                                                         0 .1 4                                                  0 .1 0     0 .0 8

                                 0
                                      DC         NJ         M A        NY        CT         DE        NV            RI          LA        AZ               KS         WI        NE       M T          M E       ID          WY          IA        SD        ND

                                       So u r ce: F ed er al H igh w ay A d m in is t ra t io n , 2 0 0 0 H igh w a y St a t is t ics




                                                                                                                                  I n com e Pe r C apita

                               $45,000


                                                                                     4 0 ,8 7 0


                               $40,000
                                               3 8 ,3 7 4          3 7 ,7 1 0
                                                      3 7 ,1 1 2

                                                                           3 4 ,5 0 2
                               $35,000

                                                                                               3 1 ,0 7 4
                                                                                                            2 9 ,5 5 1
    2000 Income Per Capita




                                                                                                                     2 9 ,1 5 8
                               $30,000
                                                                                                                                                                      2 8 ,0 6 6
                                                                                                                                                                                                                        2 7 ,4 3 6
                                                                                                                                                            2 7 ,4 0 8          2 7 ,6 5 8
                                                                                                                                                                                                                                     2 6 ,3 7 6
                                                                                                                                                                                                  2 5 ,3 9 9                                   2 5 ,9 9 3
                                                                                                                                            2 4 ,9 9 1                                                                                                  2 4 ,7 8 0
                               $25,000
                                                                                                                                                                                                               2 3 ,6 4 0
                                                                                                                                  2 3 ,0 4 1                                             2 2 ,5 4 1




                               $20,000




                               $15,000




                               $10,000
                                               DC           NJ       MA         NY        CT        DE        NV           RI        LA        AZ              KS       WI        NE         MT         ME       ID         WY          IA        SD        ND

                                          Source: B ureau of Econom ic A naly sis D at abase [ht t p ://w w w .bea.doc.gov]




www.naic.org                                                                                                                                                                                                                                              fall 2002
30


      Annual Rates of Change in Consumer Price Indices, Average Expenditures and Premiums

                                                                                                         1996-
                                                     1996        1997      1998     1999       2000      2000

     Consumer Price Index - All Items*              3.38%       1.70%      1.67%    2.67%      3.37%    9.74%
     CPI - Auto Insurance*                          3.85%       2.50%     -0.28%    0.51%      1.85%    4.64%
     CPI - Total Medical Care*                      3.08%       2.85%     3.41%     3.70%      4.20%    14.92%
     CPI - Auto Maintenance and Repair*             3.15%       2.55%     3.04%     2.47%      3.51%    12.08%
     CPI - Legal Service Fees*                      3.63%       4.26%     4.82%     4.83%      5.17%    20.50%
     CPI - New Vehicles*                            1.83%       -0.97%    0.00%    -0.35%     -0.07%    -1.38%
     CPI - Used Vehicles*                           -2.09%      -4.84%    3.39%     1.18%      3.31%    2.84%
     Average Expenditure**                          3.38%       2.09%     -0.29%   -2.75%      0.32%    -0.69%
     Combined Average Premium**                     2.95%       2.25%     -0.15%   -2.27%      0.30%    0.08%
     Average Liability Premium**                    2.35%       0.37%     -3.30%   -5.44%     -1.34%    -9.44%
     Average Collision Premium**                    4.26%       5.84%     4.19%     1.76%      2.69%    15.24%
     Average Comprehensive Premium**                2.80%       2.46%     2.73%     0.52%      0.75%    6.60%


     * U.S. Bureau of Labor statistics [http//www.bls.gov]
     ** NAIC


   Between 1996 and 2000, the national average               injuries, medical costs, wage loss costs, litigation
expenditure for automobile insurance decreased               costs, etc. Property damage liability and physical
by 0.69 percent, while the CPI for all goods                 damage premiums are affected by claim
increased by 9.74 percent. Over the same period,             frequency, severity of damages, the cost of
the automobile insurance component of the CPI                vehicles, cost of repairs, auto parts, labor, motor
increased by 4.64 percent. The basic economic                vehicle theft rate, windstorms, hailstorms, etc.
law of demand explains the difference between
the change in the CPI-Auto Insurance component               Limitations on Comparability of Data
and that of the measured average expenditure.
As the price of insurance (as measured by the                   Comparisons of average expenditures and
CPI) increases, the amount of insurance                      average premiums between states can be
demanded decreases (i.e., dropping coverage or               misleading. The average expenditure and
increasing deductibles), leading to a smaller                average premium are imperfect measures of the
increase in the average expenditure. The national            relative “price” of insurance across states
combined average premium increased a mere                    because, as indicated above, the auto insurance
0.08 percent. Average liability premiums                     product is not homogenous across states. While
decreased over the period 1996-2000 . Premiums               these data do tend to reflect the average
charged for a particular coverage and annual                 expenditures within a state, it cannot be assumed
changes in those premiums vary based on the                  that the data for each state represent an equal
specific factors affecting that coverage. Bodily             exposure and coverage upon which conclusions
injury liability premiums are affected by the                can be drawn concerning the relative purchasing
frequency of liability claims, the severity of               power of the insurance dollar in each state.


fall 2002                                                                                  NAIC Research Quarterly
                                                                                                     31


Socioeconomic differences:                           spending for insurance, but they do not provide
                                                     information on how much insurance the
   A state's average expenditure and average         consumers are purchasing for their dollars.
premium will be relatively higher if policyholders
in that state tend to purchase higher limits or      Demographics:
insure more expensive cars. The type and amount
of coverage purchased by an individual is               Automobile premiums are higher in urban
influenced by various factors, both economic and     areas. Therefore, those states with a higher
non-economic. Depending on the individual's          percentage of population in urban areas will tend
economic situation, an insured may acquire just      to have higher average premiums than states
the minimum required financial responsibility        with a lower percentage of urban population. In
limits of liability coverage or may elect to         addition, states that gain population rapidly do
purchase higher limit coverage or one or more of     so in urban areas. This exaggerates the increase
the other available types of coverage. The buying    in average premium from year to year, because
behavior of consumers will be influenced by          the population increase is not spread evenly over
factors such as their relative level of risk         rural and urban areas.
aversion, whether they drive mostly in rural or
urban areas, weather and traffic conditions in       Conclusion
their area, and many other variables.
                                                        An important distinction must be made about
Different auto insurance requirements, benefit       this report. This report provides information that
levels and average exposure by state:                the average consumer in State A spends more
                                                     money on auto insurance than the average
   Some states have tort automobile insurance        consumer in State B. It does not provide
laws, while others have no-fault or add-on laws.     information on whether the average consumer
Some states do not have a compulsory auto            in State A gets more or less insurance coverage
insurance law. Minimum required limits for           per dollar than the average consumer in State
liability vary from state to state as well as        B. Several factors make this distinction
required policy benefits. Some states have a         important, from different minimum insurance
much higher uninsured motorist exposure than         requirements between states to the fact that the
others. Different average vehicle values exist       peace of mind the consumer gains from having
from state to state. The number of vehicles          insurance is completely subjective and cannot be
receiving multiple car discounts in a state will     measured.
also affect the average premium per vehicle. All
of these variations emphasize that these data           Questions about the report may be referred
reflect how much consumers, on average, are          to Natalai Webster Hughes at (816) 842-3600.




                                                                     NAIC Winter
                                                                    National Meeting
                                                                   December 7-10, 2002
                                                                  San Diego, California



www.naic.org                                                                                    fall 2002
32

                                          Table 1 - Private Passenger Automobile Insurance
                                      State Average Expenditures and Average Premiums - 2000
                                                                  Combined      Liability    Collision   Comprehensive
                                                     Average        Average      Average      Average         Average
                        State                     Expenditure Rank Premium Rank Premium Rank Premium Rank    Premium Rank
                        Alabama (1)                      593.65        35       718.16       31      319.76       37      278.56        11            119.84        34
                        Alaska                           770.11        11       912.78       10      457.14       11      317.17         5            138.47        22
                        Arizona                          791.99        10       876.38       12      449.82       14      251.75        21            174.81        11
                        Arkansas                         606.05        33       721.84       30      330.16       35      255.31        19            136.37        23
                        California (2)                   658.32        25       765.20       23      391.24       21      263.64        15            110.32        42
                        Colorado                         754.88        13       881.74       11      435.04       16      244.80        24            201.89         2
                        Connecticut                      871.20         5       953.77        6      549.24        5      276.61        12            127.91        27
                        Delaware                         848.51         6       927.30        9      566.03        4      248.13        23            113.14        37
                        District of Columbia             996.39         1     1,143.71        2      548.08        6      368.40         3            227.23         1
                        Florida                          746.29        14       798.59       20      456.95       12      229.20        35            112.44        39
                        Georgia                          674.12        23       810.23       18      339.34       32      323.44         4            147.45        19
                        Hawaii                           700.09        17       811.50       17      502.98        9      216.60        39             91.92        50
                        Idaho                            505.16        47       608.70       48      285.69       45      195.00        48            128.01        26
                        Illinois (4)                     651.60        27       725.95       28      348.30       27      265.70        14            111.95        41
                        Indiana                          570.27        39       657.68       40      321.22       36      229.57        34            106.90        46
                        Iowa                             478.75        49       557.67       51      253.76       48      179.79        51            124.12        31
                        Kansas                           558.27        42       688.76       36      268.21       47      226.60        37            193.95         3
                        Kentucky                         615.69        30       733.75       27      389.94       22      235.14        33            108.67        45
                        Louisiana                        806.01         9       928.48        8      467.29       10      296.84         7            164.35        15
                        Maine                            528.08        46       599.88       50      293.38       42      206.24        43            100.27        49
                        Maryland                         757.41        12       828.22       15      450.11       13      255.15        20            122.95        32
                        Massachusetts (5)                945.61         3     1,028.62        4      596.58        2      289.66         8            142.38        20
                        Michigan                         714.51        16       858.28       13      286.96       44      404.75         1            166.58        13
                        Minnesota                        695.55        19       762.84       24      409.10       18      195.31        47            158.44        16
                        Mississippi                      654.16        26       770.22       22      332.76       33      272.93        13            164.53        14
                        Missouri                         611.73        32       709.59       34      331.36       34      251.06        22            127.18        28
                        Montana                          530.43        45       671.57       38      290.24       43      198.54        44            182.79         9
                        Nebraska                         532.74        44       649.45       42      275.82       46      195.97        45            177.66        10
                        Nevada                           829.28         7       937.54        7      531.63        8      279.96        10            125.95        29
                        New Hampshire                    665.47        24       713.15       33      373.20       25      239.28        30            100.68        48
                        New Jersey (3,6)                 977.07         2     1,146.39        1      586.74        3      373.22         2            186.43         6
                        New Mexico                       674.27        22       828.33       14      398.07       20      261.41        17            168.85        12
                        New York                         935.64         4     1,091.43        3      613.27        1      288.60         9            189.56         5
                        North Carolina                   563.66        41       670.35       39      317.60       38      240.24        29            112.51        38
                        North Dakota                     477.28        51       601.32       49      231.54       51      186.75        49            183.02         8
                        Ohio                             579.05        37       645.79       45      340.57       31      216.79        38             88.43        51
                        Oklahoma                         602.72        34       736.17       26      340.62       30      242.88        27            152.66        17
                        Oregon                           625.37        28       704.55       35      381.87       24      212.36        40            110.32        43
                        Pennsylvania                     698.56        18       775.85       21      421.01       17      240.47        28            114.38        36
                        Rhode Island                     825.44         8       972.01        5      539.03        7      308.09         6            124.89        30
                        South Carolina                   612.07        31       725.03       29      345.38       28      237.90        31            141.76        21
                        South Dakota                     478.42        50       618.88       46      251.27       49      182.30        50            185.31         7
                        Tennessee                        592.33        36       687.09       37      313.02       39      261.87        16            112.19        40
                        Texas (7)                        677.83        21       759.45       25      388.79       23      235.91        32            134.75        24
                        Utah                             620.05        29       718.03       32      352.11       26      243.93        25            121.99        33
                        Vermont                          568.39        40       647.65       43      294.55       41      243.07        26            110.03        44
                        Virginia                         576.08        38       650.84       41      341.19       29      208.51        41            101.13        47
                        Washington                       722.48        15       803.76       19      445.96       15      227.93        36            129.87        25
                        West Virginia                    680.09        20       815.10       16      405.63       19      258.69        18            150.78        18
                        Wisconsin                        551.33        43       613.81       47      298.95       40      195.72        46            119.14        35
                        Wyoming                          495.60        48       646.27       44      246.96       50      208.20        42            191.11         4
                        Countrywide                     $687.04               $786.08               $398.23              $256.22                     $131.63
                         1 During 2000 the began implementation of a mandatory liability auto insurance law. Due to to this implementation, the 2000 liability written premiums
     1 During 2000 the state of Alabamastate of Alabama began implementation of a mandatory liability auto insurance law. Duethis implementation, the 2000 liability writte
                           and liability written car-years increased significantly reported for 1999.
       and liability written car-years increased significantly over thoseover those reported for 1999.
     2 California data has not been confirmed. (See Technical Notes for further explanation)
                         2 California data has not been confirmed. (See Technical Notes for further explanation)
                         3 The District New Jersey are entirely are entirely their results results cannot be directly compared the results states with rural areas.
     3 The District of Columbia and of Columbia and New Jersey urban and urban and their cannot be directly compared to to the results of states with rural areas.
                         4 Contact the Illinois Department of obtain more geographic specific specific information.
     4 Contact the Illinois Department of Insurance to Insurance to obtain more geographic information.
                         5 Safe Driver Plan credits and surcharges. (See Technical Notes for further explanation)
     5 Data incorporates Data incorporates Safe Driver Plan credits and surcharges. (See Technical Notes for further explanation)
     6 Historically, New Historically, New Jersey3 times the national average average in dividends, which reduces the averageexpenditureand average premiums paid by N by New Jersey
                         6 Jersey has paid 2 to has paid 2 to 3 times the national in dividends, which reduces the average expenditure and average premiums paid
                           policyholders.
       policyholders.
                         7 Historical data reporting anomalies limit the comparability of Texas results with results from other states. (See Technical Notes for further explanation)
     7 Historical data reporting anomalies limit the comparability of Texas results with results from other states. (See Technical Notes for further explanation)
                                                                                            COMBINED AVERAGE PREMIUM=(Liability Average Premium +
     AVERAGE EXPENDITURE=(Total Written Premium/Liability Car-Years) COMBINED AVERAGE PREMIUM=(Liability Average Premium +
                         AVERAGE EXPENDITURE=(Total Written Premium/Liab
                                                                                            Collision Average Comprehensive Average Premium)
     AVERAGE PREMIUM=(Written Premium/Written Car-Years) Collision Average Premium +Premium + Comprehensive Average Premium)
                         AVERAGE PREMIUM=(Written Premium/Written Car-Ye
     SOURCES: AAIS, ISO, NAII, NISS, California Department of Insurance, Massachusetts Commonwealth Automobile Reinsurers, and Texas Department of Insurance.
                         SOURCES: AAIS, ISO, NAII, NISS, California Department of Insurance, Massachusetts Commonwealth Automobile Reinsurers, and Texas Department o
fall 2002                                                                                                                                         NAIC Research Quarterly
                                                                                                    33


NAIC Action on Model Laws and White Papers
   at the 2002 Summer National Meeting
           By Carolyn J. Johnson, CLU, Senior Counsel and Model Laws Coordinator and
                                   Neal Kounkel, Paralegal II




   Following is a brief description of the NAIC’s      The Regulatory Framework (B) Task Force
action on model laws and papers that occurred          considered a model that incorporates
at the Summer National Meeting in                      requirements set forth in an interim final rule
Philadelphia. The Executive Committee and              issued by the three federal agencies charged
Plenary adopted three models. Two model drafts,        with administering the provisions of the
one actuarial guideline and three white papers         Health Insurance Portability and
have been adopted by parent committees and             Accountability Act of 1996 (HIPAA). This
were considered for adoption by the Executive          regulation prohibits group health carriers
Committee in September. Seven new drafts of            from discriminating against individual
models and one white paper were released for           participants or beneficiaries based on any
comment at the Philadelphia meeting.                   health factor. This regulation will apply to
                                                       any health carrier that provides health
Models Adopted by Executive Committee                  insurance coverage in the group market. The
and Plenary                                            task force unanimously adopted the model
                                                       at the Spring National Meeting and
1. Prohibition on the Use of Discretionary             forwarded it to the Health Insurance and
   Clauses Model Act (Draft: 6/9/02)                   Managed Care (B) Committee, which also
                                                       adopted the model. The Executive Committee
    The ERISA Working Group of the Health              and Plenary adopted the model in June.
    Insurance and Managed Care (B) Committee
    discussed a model act that clarifies the         3. Home Service Disclosure Model Act
    authority of states under ERISA’s saving            (Draft: 3/7/02)
    clause to prohibit the use of discretionary
    clauses in insurance contracts. Interested         The Home Service Working Group of the
    parties presented their concerns at the Spring     Market Regulation and Consumer Affairs (D)
    National Meeting and, after some discussion,       Committee drafted a new model to establish
    the model was adopted by the working group         rules that ensure meaningful information is
    and the Health Insurance and Managed Care          provided to the purchasers of insurance
    (B) Committee. The Executive Committee             policies distributed through the home service
    and Plenary both discussed the model               system. The Market Conduct and Consumer
    extensively before adopting it at the Summer       Affairs Committee initially adopted the model
    National Meeting.                                  at the 2000 Fall National Meeting in Dallas.
                                                       At the 2000 Winter National Meeting, the
2. Nondiscrimination in Health Insurance               Executive Committee referred the model to
   Coverage in the Group Market Model                  the Small Face Amount (A) Working Group
   Regulation (Draft: 3/18/02)

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34


     for possible additions. That working group          make it easier for MGAs to be licensed in
     amended the model to be consistent with the         multiple states and to create uniform
     document drafted for disclosure of small face       licensing standards for MGAs in all states. A
     amount policies and adopted it at the Winter        late addition to the model is a requirement
     National Meeting. The Life Insurance and            for all MGAs to provide an annual audited
     Annuities (A) Committee made several                financial statement. The working group
     technical amendments, adopted the model,            adopted the revised model act at the 2002
     and forwarded it back to the Market                 Spring National Meeting and forwarded it to
     Regulation and Consumer Affairs (D)                 the parent committee, which also adopted the
     Committee which adopted it at after                 revised model act. The Executive Committee
     incorporating a few more technical changes.         voted to refer the model to the NARAB (G)
     In June it was adopted by the Executive             Working Group for review of the bond
     Committee and Plenary.                              requirement.

Models Deferred By the Executive                      Models Considered for Adoption by the
Committee Until the Fall National Meeting             Executive Committee at the Fall National
                                                      Meeting in New Orleans
1. Property and Casualty Model Rating Law
   (#775 and #780) (Draft: 8/27/01)                   1. Nonadmitted Insurance Model Act (#870)
                                                         (Draft: 6/9/02)
     Some time ago, the Statistical Information
     (C) Task Force adopted revisions to the two         The Nonadmitted Model Act Revision
     rating laws sections dealing with statistical       Working Group of the Surplus Lines (C) Task
     data collection and the permissible level of        Force considered new provisions for the
     disclosure. The draft included numerous             licensure of surplus lines agents and brokers.
     drafting notes with options for states to           The purpose of the changes is to bring the
     consider. Texas presented an alternative            model into compliance with the non-resident
     proposal for discussion that is silent with         licensing requirements of the Gramm-Leach-
     regard to data release. The proposal was            Bliley Act. The working group adopted the
     considered further at the Spring National           changes at the Summer National Meeting
     Meeting and adopted by the Property &               and forwarded the model to its parent task
     Casualty Committee. The Executive                   force, which adopted the model. The Property
     Committee voted to defer action until the Fall      and Casualty Insurance (C) Committee also
     National Meeting to allow further review of         adopted the recommended changes at the
     the model.                                          Summer National Meeting.

Models Referred to Other Committees                   2. Group Coverage Discontinuance and
                                                         Replacement Model Regulation (#110) (Draft:
1. Managing General Agents Act (#225) (Draft:            3/18/02)
   3/17/02)
                                                         The Regulatory Framework Task Force of the
     Changes to the Managing General Agents Act          Health Insurance and Managed Care (B)
     were prepared by a subgroup of the Agent            Committee reviewed a third draft of proposed
     Licensing Working Group of the Market               revisions of the Group Coverage
     Regulation and Consumer Affairs (D)                 Discontinuance and Replacement Model
     Committee. The changes are designed to              Regulation. Section 7 was revised to include
fall 2002                                                                       NAIC Research Quarterly
                                                                                                       35


    requirements regarding the liability of              and disadvantages of the master policy
    carriers after the date of discontinuance of a       approach and the multiple coordinated policy
    policy or contract. Another revision in Section      approach, discusses the use of new terms to
    3C includes a new definition of health               represent language previously associated
    insurance coverage and Section 3A is altered         with these types of operations and provides
    to include non-profit health service plans.          a listing of various issues for state regulators
    Finally, revisions in Section 2 remove the           and legislators to ponder when considering
    reference to non-profit health service plans,        these issues in their state. The task force
    which are now included in the definition of          adopted the white paper during the 2002
    “carrier.” The revised draft received no             Summer National Meeting, followed by
    additional amendments since it was received          adoption by the Property and Casualty
    at 2002 Spring National Meeting. All                 Insurance (C) Committee.
    revisions to the draft were adopted at the
    2002 Summer National Meeting by the               2. White Paper on Application and Use of
    Regulatory Framework Task Force and the              Insurance Fraud-Related Databases and
    Health Insurance & Managed Care                      Sources of Information: A Guide for State
    Committee.                                           Insurance Departments (Draft: 5/6/02)

3. Actuarial Guideline AXXX: The Application             The Database Working Group of the
   of the Valuation of Life Insurance Policies           Antifraud (G) Task Force distributed a final
   Model Regulation (Draft: 6/7/02)                      draft of a white paper describing antifraud-
                                                         related databases of use to insurance
    The Life and Health Actuarial Task Force             regulators. Comments on the draft were
    developed a guideline to interpret the               solicited from regulators and interested
    Valuation of Life Insurance Policies Model           parties. The Task Force adopted the white
    Regulation. Since adoption of that model, a          paper at the 2002 Summer National Meeting,
    number of questions have arisen about how            as did the parent Special Insurance Issues
    the model applies to particular policy designs.      (G) Committee.
    The purpose of the guideline is to provide
    direction regarding applicability to those        3. White Paper on Investigation and Prosecution
    products. The revised draft was adopted by           of Insider Misconduct in the Insurance
    the task force and by the parent Life                Industry: A Guide for State Insurance
    Insurance and Annuities (A) Committee at             Departments (Draft: 3/18/02)
    the 2002 Summer National Meeting.
                                                         The Producer, Company and Unauthorized
White Papers          Adopted       by   Parent          Entities Unlawful Activity Working Group of
Committees                                               the Antifraud (G) Task Force distributed a
                                                         final draft of a white paper for discussion.
1. Report on Employee Leasing and Professional           The paper includes a definition of insider
   Employer Organizations (Draft: 6/05/02)               fraud, which should be of use to other
                                                         regulatory specialists. The task force and its
    The NAIC/IAIABC Joint Working Group of               parent Special Insurance Issues (G)
    the Workers’ Compensation (C) Task Force             Committee adopted the white paper at the
    has been drafting a report on employee               2002 Summer National Meeting.
    leasing. The report weighs the advantages

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36


New Drafts of Models Released for                         development of the 1980 CSO table in current
Comment                                                   usage. This table may be used as the
                                                          minimum standard for policies issued after
1. Health Carrier Grievance Procedure Model               a specified date, following or coincident with
   Act (#72) (Draft: 6/3/02)                              the effective date of this regulation. This table
                                                          is functional with plans of insurance that
     The Regulatory Framework (B) Task Force              have separate rates for nonsmokers and
     discussed revisions to the Health Carrier            smokers, gender-blended tables and age-last
     Internal Review and Grievance Procedure              birthday-basis for mortality tables.
     Model Act. The revisions bring this model into
     compliance with the Department of Labor           4. Viatical Settlements Model Regulation (#698)
     claims procedure final rule in order to avoid        (Draft: 6/8/02)
     federal preemption. Members of the task
     force requested that any new comments                The Viatical Settlements Working Group of
     concerning the proposed revisions be                 the Life Insurance and Annuities (A)
     submitted by August 1, 2002.                         Committee is making amendments to the
                                                          Viatical Settlements Model Regulation to
2. Utilization Review and Benefit Deter-                  comply with the model act adopted in March
   mination Model Act (#73) (Draft: 6/3/02)               2001. Decisions have been made on
                                                          educational and testing requirements for
     The Regulatory Framework (B) Task Force              brokers, a new license requirement for an
     participated in a lengthy discussion on              investment agent, and technical amendments
     revisions to the Utilization Review Model Act,       to several sections. The working group
     including a broadening of its scope, as              considered comments on the table of
     reflected in the new title. The revisions bring      reasonable payments and the informational
     this model into compliance with the                  brochures on viatical settlements and decided
     Department of Labor claims procedure final           to discuss the issues further. A proposal for
     rule in order to avoid federal preemption.           an abbreviated broker licensing process for
     Members of the task force requested that any         life insurance agents was discussed prior to
     new comments concerning the proposed                 the Fall National Meeting.
     revisions be submitted by August 1, 2002.
                                                       5. Market Conduct Record Retention Model
3. Recognition of the 2001 CSO Mortality Table            Regulation (#910) (Draft: 5/30/02)
   for Use in Determining Minimum Reserve
   Liabilities and Nonforfeiture Benefits Model           The Record Retention Model Subgroup of the
   Regulation (Draft: 6/6/02)                             Market Conduct Examination Oversight (D)
                                                          Task Force is considering revisions to the
     This regulation, being developed by the Life         Market Conduct Record Retention Model
     and Health Actuarial Task Force, is designed         Regulation. The draft was created using the
     to prescribe the use of the 2001                     NAIC model in conjunction with legislation
     Commissioners Standard Ordinary (CSO)                from several other states. The regulation will
     Mortality Table. The 2001 CSO Mortality              need to be compared to the federal Electronic
     Table is a new mortality table developed by          Signatures in Global and National Commerce
     the American Academy of Actuaries to reflect         Act; the federal law may impact some of the
     improvements in mortality since the                  requirements to be incorporated in the


fall 2002                                                                          NAIC Research Quarterly
                                                                                                    37


    revised model regulation. The working group        Section 10, “Privacy Notices to Group
    heard comments and agreed to incorporate           Policyholders.” The Working Group and
    language regarding confidentiality in the          interested parties were asked to review the
    model. Numerous other comments were                draft amendment to the Privacy of Consumer
    discussed and served as the basis of               Financial and Health Information Model
    amendments to the model. An additional             Regulation and submit written comments by
    conference call were scheduled during the          June 30, 2002. After reviewing all comments
    interim to further revise the draft model.         and revising the proposed amendment as
    Members of the Task Force anticipate that          necessary, the working group will convene a
    the model will be adopted at the 2002 NAIC         conference call to discuss the draft and listen
    Fall National Meeting.                             to interested party comments. The proposed
                                                       amendment is a clarification to the model
6. Health Maintenance Organization Model Act           regulation, not a substantive change. It is
   (#430) (Draft: 5/17/02)                             intended to make clear the intent of the
                                                       drafters of the model when it was originally
    The Managed Care Organization Working              adopted by the NAIC.
    Group of the Regulatory Framework (B) Task
    Force is considering amendments that would      New Drafts of White Papers Released for
    revise the Health Maintenance Organization      Comment
    Model Act. Based on discussions during the
    2002 Spring National Meeting and a              1. White Paper on The Regulation of Voluntary
    conference call, a new draft of the HMO            Accident and Health and Property and
    Model Act was prepared prior to the 2002           Casualty Underwriting and Reinsurance
    Summer National Meeting. The working               Pools (Draft: 06/11/02)
    group reviewed comments received on the
    draft language on the regulation of                The Underwriting and Reinsurance Pools
    downstream risk entities concerning                Working Group of the Financial Condition (E)
    provisions in the draft on contracting             Committee reviewed a draft of a white paper
    requirements and uncovered expenditure             on the regulation of reinsurance pools. The
    deposit requirements. A conference call was        white paper represents the working group’s
    held to finalize language in Sections 15, 16       final deliverable and addresses the working
    and 17 of the HMO model. The working               group’s position on monitoring the financial
    group continued discussions of the                 condition of pools and proper accounting
    downstream risk proposal and the draft HMO         guidance for pools. The working group
    Model Act during meetings at the 2002 NAIC         released the report for public comment.
    Fall National Meeting.
                                                    No Further Versions of These Drafts
7. Privacy of Consumer Financial and Health         Released
   Information Regulation (Draft: 6/05/02)
                                                    1. Life Insurance and Annuities Suitability
    The Privacy Working Group reporting to the         Model Act (Draft: 3/18/02)
    Executive (EX) Committee distributed a draft
    amendment of the model privacy regulation          The Suitability Working Group of the Life
    for comment. Changes to the model include          Insurance and Annuities (A) Committee
    a revision to the definition of “consumer” in      drafted a new model regulation addressing
    Section 4F(2)(e) and the addition of new           the suitability of sales of life insurance and

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38


     annuities. For states without the regulatory        prescription drug benefit coverage conditions,
     authority to adopt the model regulation, the        such as dosage restrictions and prior
     drafters developed a statute with enabling          authorization and step therapy requirements.
     authority. At the 2002 Spring National              The working group reviewed a new draft and
     Meeting, the working group completed its            comments at the 2002 Fall National Meeting.
     review of the model, which was adopted by
     the working group and forwarded to its           5. Model Regulation to Implement the Small
     parent committee. The Life Insurance and            Employer Health Insurance Availability
     Annuities Committee heard comments on the           Model Act (Prospective Reinsurance With or
     model at the Summer National Meeting, but           Without an Opt-Out) (#119) (Draft:
     decided to defer action to study the issue          3/19/01)
     further.
                                                         The NAIC charged the Regulatory
2. Life Insurance and Annuities Suitability              Framework (B) Task Force with reviewing
   Model Regulation (Draft: 3/18/02)                     and revising NAIC model laws and
                                                         regulations affected by the Health Insurance
     In the white paper drafted by the Suitability       Portability and Accountability Act of 1996
     Working Group of the Life Insurance and             (HIPAA) and federal regulations adopted
     Annuities (A) Committee and adopted in 2000         pursuant to HIPAA. A first draft of
     by the Executive Committee and Plenary, the         amendments to this model regulation to
     working group recommended suitability               conform both with HIPAA regulatory
     standards for insurers issuing life insurance       requirements and the rating provisions of the
     and annuities. The model was adopted by the         Small Employer Health Insurance
     working group at the 2002 Spring National           Availability Model Act was prepared and
     Meeting and forwarded to its parent                 discussed by the task force. The task force
     committee. The Life Insurance and Annuities         referred provisions of this model regulation
     Committee heard comments on the model at            concerning rating to the Accident and Health
     the 2002 Summer National Meeting and                Working Group of the Life and Health
     decided to defer action on this model to allow      Actuarial Task Force for drafting assistance.
     further comment.
                                                      6. Model Regulation to Require Reporting of
4. Health Carrier Prescription Drug Benefit              Statistical Data by Property and Casualty
   Management Model Act (Draft: 2/11/02)                 Insurance Companies (#751) (Draft: 3/9/00)

     The Pharmaceutical Issues Working Group             The Statistical Handbook Working Group of
     of the Regulatory Framework (B) Task Force          the Statistical Information (C) Task Force is
     reviewed comments from interested parties           considering changes that would be necessary
     on the latest draft of this new model law. The      should the data quality standards and
     purpose is to provide standards for the             provisions be added to the Statistical
     establishment, maintenance and manage-              Handbook. The changes concern primarily
     ment of prescription drug formularies and           effective dates and references to state
     other pharmaceutical management                     exception. The working group also is
     procedures used by health carriers that             reviewing whether any commercial lines
     provide prescription drug coverage.                 should be excluded from the provisions of the
     Procedures under discussion include                 model regulation.


fall 2002                                                                       NAIC Research Quarterly
                                                                                                      39


7. Property and Casualty Rate and Policy Form             Model Law. It addresses only those areas
   Model Law (#775) (Draft: 3/6/00)                       where the model law directed that the
                                                          commissioner “shall” develop a regulation.
    The Regulatory Re-engineering White Paper             The model regulation was adopted by the
    proposed that the NAIC replace the prior              Property and Casualty Insurance (C)
    model rating laws with a single model that            Committee in 2000. The Executive
    will address both rate and form filing. This          Committee referred the model to the Speed
    task was taken up by the Commercial Lines             to Market (EX) Working Group for further
    Re-engineering Working Group of the                   consideration and evaluation with regard to
    Property and Casualty Insurance (C)                   the Statement of Intent.
    Committee. The new law would provide the
    commissioner with the authority and the            9. Determination of Nonforfeiture Benefits and
    charge to recognize the effectiveness of              Guaranteed and Non-Guaranteed Elements
    competition as a means to regulate rates. It          for Life Insurance and Annuity Contracts
    would also provide the authority and the              (Draft: 9/8/00)
    charge to recognize situations where the
    benefits of filing and prior approval of forms        The Life and Health Actuarial Task Force
    are outweighed by the burden and cost these           was charged with developing a new
    review procedures place upon commercial               nonforfeiture law for life insurance, health
    lines insurers and insureds.                          insurance and annuities to replace the
                                                          existing nonforfeiture standards. The draft
    The basic assumption used to develop the              under development did not have strong
    proposed model is that rate filings will default      regulatory support. At the 2000 Winter
    to file and use and that policy form filings          National Meeting, a revised set of principles
    will default to prior approval, unless                was discussed. Under this approach, the
    exceptions are determined to be appropriate.          concept of an operational plan was eliminated
    The model was adopted by the Property and             in favor of various policyholder protections
    Casualty Insurance (C) Committee in 2000.             being triggered if a company substantially
    The Executive Committee referred the model            changes the way it determines
    to the Speed to Market (EX) Working Group             nonguaranteed elements. Regulators
    for further consideration and evaluation with         generally agree on a few concepts:
    regard to the Statement of Intent. The                retrospective design, floor for benefits, cash
    Improvements to State-Based Systems                   value and some degree of regulator control
    Working Group (successor group to the                 for nonguaranteed elements.
    project) adopted a condensed version of these
    amendments and will work on the entire             10.Model Regulation to Implement the
    model later.                                          Individual Health Insurance Portability
                                                          Model Act (#38) (Draft: 12/4/00)
8. Property and Casualty Rate and Policy Form
   Model Regulation (Draft: 3/14/00)                      The Regulatory Framework Task Force of the
                                                          Health Insurance and Managed Care (B)
    The Commercial Lines Re-engineering                   Committee is considering amendments to
    Working Group of the Property and Casualty            conform this model to the provisions of the
    Insurance (C) Committee developed this                Health Insurance Portability and
    model regulation as a complement to the               Accountability Act of 1996 (HIPAA). The
    Property and Casualty Rate and Policy Form            working group discussed whether any
www.naic.org                                                                                     fall 2002
40


     revisions to the HMO Model Act are required           insurance charges for minimum values
     by HIPAA. While revisions are not necessary,          calculated on the retrospective approach that
     the working group agreed to consider revising         are consistent with the level of the minimum
     Section 25. Open Enrollment to include the            premium required to be paid to maintain the
     concept of “federally defined eligible                secondary guarantee. At the 2002 Summer
     individuals.” The working group also agreed           National Meeting, the task force decided to
     to include the HIPAA-defined term “health             reformat the guidelines as a regulation
     status-related factor” in Section 10 in place
     of the current language that expresses the         12.Actuarial Guideline GICs: Guideline for
     same concept. The language in Section 10,             Valuation Rate of Interest for Funding
     however, needs to clarify that, while an              Agreements and Guaranteed Interest
     individual cannot be singled out to pay a             Contracts (GICs) with Bail-Out Provisions
     higher rate based on health status, this is           (Draft: 3/15/02)
     not intended to prohibit experience rating of
     groups.                                               The purpose of this new actuarial guideline
                                                           being developed by the Life and Health
11.Actuarial Guideline XYZ: Minimum                        Actuarial Task Force is to interpret the
   Nonforfeiture Values For Universal Life                 Standard Valuation Law for assignment of
   Insurance Products And Variable Universal               appropriate valuation interest rates to risks
   Life Insurance Products With Secondary                  embedded in bail-out provisions under
   Guarantees (Draft: 3/15/02)                             funding agreements and guaranteed interest
                                                           contracts.
     The Life and Health Actuarial Task Force
     proposed this new actuarial guideline, which       13.Actuarial Guideline MMMM: Reserves for
     was submitted by a group of regulators and            Variable Annuities with Guaranteed Living
     industry representatives. The purpose of this         Benefits (Draft: 12/6/01)
     guideline is to provide the method and
     standards to determine minimum                        The Life and Health Actuarial Task Force is
     nonforfeiture values for universal life and           considering Actuarial Guideline MMMM. The
     variable universal life insurance products            purpose of this guideline is to interpret the
     with secondary guarantees, consistent with            standards for the valuation of reserves for
     the law and the NAIC Universal Life                   Guaranteed Living Benefits included in
     Insurance Model Regulation and based on a             variable deferred and immediate annuity
     retrospective approach. At present, for many          contracts (VAGLBs). This guideline codifies
     of these policies, the cost of insurance charges      the basic interpretation of the Commissioners
     are assessed at a level inconsistent with the         Annuity Reserve Method (CARVM) by
     minimum premium required to maintain the              clarifying      the     assumptions      and
     guarantee and can produce minimum cash                methodologies that will comply with the
     values based on the retrospective approach            intent of the NAIC model Standard Valuation
     significantly lower than are reasonable. That         Law. This guideline also interprets the
     is because the cost of insurance charges is           standards for applying CARVM to VAGLBs;
     based on the contractual guarantee, which             clarifies standards for developing Integrated
     may be far greater than the cost implied by           Benefit Streams, where VAGLBs are
     the minimum premium level. This guideline             integrated with other guaranteed and
     corrects that inconsistency by requiring, for         variable benefits; clarifies standards for
     the secondary guarantee, the use of cost of           determining the level of reserves to be held
fall 2002                                                                         NAIC Research Quarterly
                                                                                                     41


    in the General Account; clarifies standards         The Senior Counseling Activities Working
    for reserves when the VAGLB risk is                 Group of the Senior Issues (B) Task Force
    reinsured; and presents an approach on how          reviewed a draft of the white paper on
    to integrate VAGLBs with other guaranteed           Medicare in Coordination with Other
    benefits within Integrated Benefit Streams.         Insurance Coverage. Numerous substantive
    At the 2002 Summer National Meeting, the            changes based on comments from the Centers
    American Academy of Actuaries agreed to             for Medicare & Medicaid Services, the Center
    provide suggestions for changes.                    for Medicare Advocacy and the Western
                                                        Minnesota Legal Services were discussed by
14.Section V(A) Medicare and Employer Group             the working group. The working group
   Health Plan Coverage of the White Paper on           opened the draft for comments until July 8,
   Medicare in Coordination with other                  2002. The goal of the working group is to
   Insurance Coverage (Draft: 03/15/02)                 keep the white paper simple, but to provide
                                                        sufficient information so that it is useful.




        NAIC National Meetings Calendar
      Year      Spring            Summer                  Fall                  Winter
           .                 .                    .                       .
      2002 March 16-20, 2002 June 8-11, 2002      September 9-12, 2002    December 7-10, 2002
           Reno, NV          Philadelphia, PA     New Orleans, LA         San Diego, CA
           Hilton, HQ        Marriott, HQ         Hilton, HQ              Marriott, HQ
           .                 .                    .                       .
      2003 March 8-12, 2003 June 21-25, 2003      September 13-17, 2003   December 5-10, 2003
           Atlanta, GA       New York, NY         Chicago, IL             Anaheim, CA
           Atlanta Marriott  New York Hilton      Chicago Hilton and      Hilton Anaheim, HQ
           Marquis, HQ       and Towers, HQ       Towers, HQ
           .                 .                    .                       .
      2004 March 6-10, 2004 June 12-15, 2004      September 11-15, 2004   December 4-8, 2004
           New York, NY      San Francisco, CA    Anchorage, AK           New Orleans, LA
           Sheraton New      San Francisco        Anchorage Hilton, HQ    New Orleans
           York, HQ          Marriott, HQ                                 Marriott, HQ




www.naic.org                                                                                    fall 2002
42


                            NAIC Education & Training Department
                                 September – December 2002

                                Schedule of Regulator-only Programs
                          Program                      Dates               Hotel/City
             1. ONLINE: Core Legal Training      Sept. 23 – 30        www.naic.org/education

             2. ONLINE: Financial Examiners      Sept. 23 – Oct. 18   www.naic.org/education
                                                                      Hyatt Regency
             3. Market Conduct Handbook          Sept. 30 – Oct. 2
                                                                      Kansas City
             4. ONLINE: Life Financial
                                                 Sept. 30 – Oct. 11   www.naic.org/education
                Analysis
             5. ONLINE: ISQ                      Oct. 7 – 25          www.naic.org/education
                                                                      Hyatt Regency
             6. Surplus Lines                    Oct. 16 – 18
                                                                      Kansas City
             7. ONLINE: P&C Financial
                                                 Oct. 21 – Nov. 1     www.naic.org/education
                Analysis
                                                                      Hyatt Regency
             8. Regulating for Solvency          Oct. 28 – 31
                                                                      Kansas City
                                                                      Hyatt Regency
             9. Consumer Assistance Training     Nov. 4 – 5
                                                                      Kansas City
            10. ONLINE: Core Legal Training      Nov. 11 – 18         www.naic.org/education
                                     Schedule of Public Programs

                         Program                      Dates                 Hotel/City
                                               Sept. 9 – Oct. 6
             1. ONLINE: AVS/ATF Training                              www.naic.org/education
                                               4 One-Week Terms
             2. Health Annual Statement                               Marriott Country Club
                                               Sept. 23 – 26
                Preparation Workshop                                  Plaza Kansas City
             3. ONLINE: Schedule P             Oct. 14 – 18           www.naic.org/education
             4. ONLINE: Annual Statement
                                               Oct. 21 – 25           www.naic.org/education
                Investment Schedules
             5. SAP Update with Annual                                Sheraton Suites Country
                                               Oct. 22 – 23
                Statement Changes                                     Club Plaza Kansas City
             6. Legal Issues in Insurance &                           Hyatt Regency Kansas
                                               Oct. 28 – 29
                Other Financial Services                              City
             7. ONLINE: Basic Reinsurance      Nov.4 – 8              www.naic.org/education

             8. ONLINE: Market Regulatory
                                               Nov. 18 – 22           www.naic.org/education
                Reform Initiatives Training
             9. ONLINE: Annual Statement
                                               Dec. 2 – 6             www.naic.org/education
                Investment Schedules
fall 2002                                                                      NAIC Research Quarterly
                    43




www.naic.org   fall 2002

				
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